Transfer Pricing · F2J-C-2820
SAP Labs India Private Limited v. Income Tax Department and connected appeals
VALIDATED · ACTUAL COURT-COPY PDFSource transparency: The local PDF is the unchanged public court-copy download. The official court portal is identified separately and is not presented as a judgment-specific deep link. Verify the official record and subsequent history before reliance.
Holding (ratio)
A transfer-pricing officer could not reject comparables merely to substitute a standard departmental set; selection required a reasoned comparability analysis.
Operative order (extract)
32. The appeals stand disposed of in view of the Pending I.As., if any, stand disposed of.
Scope limits
The decision is confined to the issues decided on the retained record; verify the complete judgment and subsequent history before reliance.
Sources and completeness
- PDF status
- Complete searchable public court copy, retained unchanged
- PDF pages
- 121
- Extracted words
- 27,941
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- Read the public report
- PDF SHA-256
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Complete searchable judgment text
-1-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
RESERVED ON : 02.04.2026
PRONOUNCED ON: 28.08.2026
R
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 28TH DAY OF AUGUST, 2026
PRESENT
THE HON'BLE MR. JUSTICE S.G.PANDIT
AND
THE HON'BLE MR. JUSTICE K. V. ARAVIND
INCOME TAX APPEAL No.10 OF 2011
C/W
INCOME TAX APPEAL No.23 OF 2011
INCOME TAX APPEAL No.24 OF 2011
INCOME TAX APPEAL No.44 OF 2015
INCOME TAX APPEAL No.128 OF 2015
INCOME TAX APPEAL No.469 OF 2015
INCOME TAX APPEAL No.492 OF 2016
Digitally signed INCOME TAX APPEAL No.514 OF 2016
by VINUTHA B
S
Location: High INCOME TAX APPEAL No.884 OF 2017
Court of
Karnataka INCOME TAX APPEAL No.955 OF 2017
INCOME TAX APPEAL No.956 OF 2017
I.T APPEAL CROSS OBJECTION No.1 OF 2018
IN ITA No. 10/2011
BETWEEN:
1. SAP LABS INDIA PRIVATE LIMITED
HAVING ITS OFFICE AT No.138,
EXPORT PROMOTION INDUSTRIAL PARK,
-2-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
WHITEFIELD ROAD, WHITEFIELD,
BANGALORE - 66.
…APPELLANT
(BY SRI. D.D. NAGESHWAR RAO, ADVOCATE)
AND:
1. THE INCOME TAX OFFICER
WARD-12(2), 14/3, 4TH FLOOR,
RASHTOTHANA BHAVAN (OPP. RBI)
NRUPATHUNGA ROAD, BANGALORE- 01
…RESPONDENT
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W.
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
THIS ITA IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING
OUT OF ORDER DATED 30-08-2010 PASSED IN ITA
No.398/BANG/2008, FOR THE ASSESSMENT YEAR 2003-2004,
PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF
LAW STATED THEREIN, ALLOW THE APPEAL AND SET ASIDE
THE ORDER PASSED BY THE ITAT BANGALORE IN ITA
No.398/BANG/2008, DATED 30-08-2010 (ANNEXURE-A), TO
THE EXTENT PRAYED FOR, IN THE INTEREST OF JUSTICE AND
EQUITY.
IN ITA No.23/2011
BETWEEN:
1. COMMISSIONER OF INCOME TAX
C R BUILDINGS, (CENTRAL) QUEENS ROAD,
BANGALORE - 560 001
2. ASSISTANT COMMISSIONER OF INCOME TAX
CIRCLE 12(3), BANGALORE
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
-3-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
AND:
1. M/S SAP INDIA PVT LTD
No.138, EXPORT PROMOTION
INDUSTRIAL PARK,
WHITE FIELD,
BANGALORE – 560 066
...RESPONDENT
(BY SRI. D.D. NAGESHWAR RAO, ADVOCATE)
THIS ITA IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING
OUT OF ORDER DATED 30/08/2010 PASSED IN ITA
No.418/BANG/2008, FOR THE ASSESSMENT YEAR 2003-04,
(ANNEXURE-A) PRAYING TO FORMULATE THE SUBSTANTIAL
QUESTIONS OF LAW STATED THEREIN, SET ASIDE THE
APPELLATE ORDER DATED 30/08/2010 PASSED BY THE ITAT,
'A' BENCH, BANGALORE, IN APPEAL PROCEEDINGS ITA
No.418/BANG/2008 (ANNEXURE-A), AS SOUGHT FOR IN THIS
APPEAL, IN THE INTEREST OF JUSTICE AND EQUITY.
IN ITA No.24/2011
BETWEEN:
1. COMMISSIONER OF INCOME TAX
C R BUILDINGS, (CENTRAL)
QUEENS ROAD
BANGALORE 560 001
2. ASSISTANT COMMISSIONER
OF INCOME TAX
CIRCLE 12(3), BANGALORE
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W.
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
AND:
1. M/S SAP INDIA PVT LTD
No.138, EXPORT PROMOTION
-4-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
INDUSTRIAL PARK,
WHITE FIELD,
BANGALORE – 560 066
...RESPONDENT
(BY SRI. D.D. NAGESHWAR RAO, ADVOCATE)
THIS ITA IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING
OUT OF ORDER DATED 30/08/2010 PASSED IN ITA
No.398/BANG/2008, FOR THE ASSESSMENT YEAR 2003-04
(ANNEXURE-A), PRAYING TO FORMULATE THE SUBSTANTIAL
QUESTIONS OF LAW STATED THEREIN, SET ASIDE THE
APPELLATE ORDER DATED 30/08/2010 PASSED BY THE ITAT,
'A' BENCH, BANGALORE, IN APPEAL PROCEEDINGS ITA
No.398/BANG/2008 (ANNEXURE-A), AS SOUGHT FOR IN THIS
APPEAL, IN THE INTEREST OF JUSTICE AND EQUITY.
IN ITA No.44/2015
BETWEEN:
1. THE COMMISSIONER OF INCOME TAX
C R BUILDING, QUEENS ROAD,
BANGALORE – 560 001
2. THE DEPUTY COMMISSIONER
OF INCOME TAX, CIRCLE-11(2)
BANGALORE.
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W.
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
AND:
1. M/S. BEARINGPOINT PROPERTY
SERVICES PRIVATE LIMITED,
(FORMERLY KNOWN AS
BEARINGPOINT BUSINESS
CONSULTING PRIVATE LTD)
SECOND FLOOR, EMBASSY
ICON ANNEX, No.2/1,
INFANTRY ROAD, BANGALORE – 560 001
-5-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
PAN AACCB9758R
...RESPONDENT
(BY SRI. K.K. CHYTHANYA, SENIOR ADVOCATE FOR
SRI. S SHARATH, ADVOCATE)
THIS ITA / INCOME TAX APPEAL IS FILED UNDER
SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF
ORDER DATED 21.08.2014 PASSED IN ITA
No.1380/BANG/2012, FOR THE ASSESSMENT YEAR 2008-09
(ANNEXURE-A) PRAYING TO DECIDE THE FOREGOING
QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF
LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS
DEEMED FIT. SET ASIDE THE APPELLATE ORDER DATED
21.08.2014 PASSED BY THE INCOME TAX APPELLATE
TRIBUNAL 'B' BENCH, BENGALURU, IN APPEAL PROCEEDINGS
No.ITA.No.1380/BANG/2012 FOR ASSESSMENT YEAR 2008-09
ANNEXURE-A AS SOUGHT FOR IN THIS APPEAL AND TO
GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE
INTEREST OF JUSTICE.
IN ITA No.128/2015
BETWEEN:
1. THE COMMISSIONER OF
INCOME TAX-II,
C R BUILDINGS, BANGALORE.
2. THE DEPUTY COMMISSIONER
OF INCOME TAX,
CIRCEL-11(2),
BANGALORE.
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W.
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
AND:
1. M/S. BEARINGPOINT PROPERTY
SERVICES PRIVATE LIMITED
(FORMERLY KNOWN AS
-6-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
BEARING POINT BUSINESS
CONSULTING PRIVATE LTD.)
SECOND FLOOR, EMBASSY
ICON ANNEX, NO.2/1,
INFANTRY ROAD
BANGALORE 560 001
PAN: AACCB9758R
...RESPONDENT
(BY SRI. K.K. CHYTHANYA, SENIOR ADVOCATE FOR
SRI S. SHARATH, ADVOCATE)
THIS ITA / INCOME TAX APPEAL IS FILED UNDER
SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF
ORDER DATED: 28/11/2014 PASSED IN ITA
No.1380/BANG/2012, FOR THE ASSESSMENT YEAR-2008-09.
PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW
AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE
FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. SET
ASIDE THE APPELLATE ORDER DATED 28/11/2014 PASSED IN
M.P.No.40/BANG/2014 IN IT(TP)A No. 1380/BANG/2012 FOR
ASSESSMENT YEAR-2008-09 ANNEXURE-A, BY THE INCOME
TAX APPELLATE TRIBUNAL, 'B' BENCH, BANGALORE AS
SOUGHT FOR, IN THE ABOVE CASE.
IN ITA No.469/2015
BETWEEN:
1. PRINCIPAL COMMISSIONER OF
INCOME TAX,
C.R. BUILDING, QUEENS ROAD,
BANGALORE - 560 001.
2. THE DEPUTY COMMISSIONER
OF INCOME TAX, CIRCLE-2(1),
BANGALORE.
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W.
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
AND:
-7-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
1. M/S. MSOURCE (INDIA) PVT. LTD.,
6TH FLOOR, A BLOCK, BAGMANE,
BAGMANE TECHNOLOGY PARK,
BYRASANDRA, C.V. RAMAN NAGAR,
BANGALORE - 560 093.
PAN: AACCM 2097G.
...RESPONDENT
(BY SRI. T. SURYANARAYANA, SENIOR ADVOCATE FOR
SMT. TANMAYEE RAJKUMAR, ADVOCATE)
THIS ITA / INCOME TAX APPEAL IS FILED UNDER
SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF
ORDER DATED:17/04/2015 PASSED IN ITA
No.1482/BANG/2010, FOR THE ASSESSMENT YEAR 2006-2007
ANNEXURE-A, PRAYING TO DECIDE THE FOREGOING
QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF
LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS
DEEMED FIT. SET ASIDE THE APPELLATE ORDER DATED:
17/04/2015 PASSED BY THE ITAT, 'B' BENCH, BENGALURU, IN
APPEAL PROCEEDINGS No. ITA No. 1482/BANG/2010 FOR
ASSESSMENT YEAR 2006-07 ANNEXURE-A, AS SOUGHT FOR
IN THIS APPEAL.
IN ITA No.492/2016
BETWEEN:
1. PR COMMISSIONER
OF INCOME TAX-VI,
CENTRAL REVENUE BUILDINGS
QUEENS ROAD,
BANGALORE 560 001
2. ADDITIONAL COMMISSIONER
OF INCOME TAX, RANGE 12,
BENGALURU
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W.
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
-8-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
AND:
1. M/S. SUBEX LTD
RMZ ECOWORLD
DEVARABISANAHALLI,
OUTER RING ROAD,
BANGALORE 560037
PAN AABCS 9255R
...RESPONDENT
(BY SRI. K.K. CHYTHANYA, SENIOR ADVOCATE FOR
SRI S. SHARATH, ADVOCATE)
THIS ITA / INCOME TAX APPEAL IS FILED UNDER
SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF
ORDER DATED 16/03/2016 PASSED IN ITA
No.223/BANG/2014, FOR THE ASSESSMENT YEAR 2009-2010
ANNEXURE-A PRAYING TO DECIDE THE FOREGOING
QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF
LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS
DEEMED FIT AND SET ASIDE THE APPELLATE ORDERS
DATED:16/03/2016 THE ITAT, 'B' BENCH, BENGALURU, IN ITA
No. 223/BANG/2014 FOR ASSESSMENT YEAR 2009-2010
ANNEXURE-A.
IN ITA No.514/2016
BETWEEN:
1. PR. COMMISSIONER OF INCOME TAX-5
BMTC COMPLEX,
KORAMANGALA, BANGALORE.
2. THE DEPUTY COMMISSIONER OF
INCOME TAX,
CIRCLE-12(2) BENGALURU.
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
AND:
-9-
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
1. M/S. NETT APP INDIA PVT. LTD.,
3RD FLOOR, FAIRWINDS BLOCK
EGL SOFTWARE PARK,
OFF. INTERMEDIATE RING ROAD,
BANGALORE - 560 071
PAN:AABCN, 4063 A
...RESPONDENT
(BY SRI. T. SURYANARAYANA, SENIOR ADVOCATE FOR
SMT. TANMAYEE RAJKUMAR, ADVOCATE)
THIS ITA / INCOME TAX APPEAL IS FILED UNDER SEC.260-
A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER
DATED:11/05/2016 PASSED IN IT(TP)A No.1614/BANG/2014,
FOR THE ASSESSMENT YEAR 2009-2010 PRAYING TO DECIDE
THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER
QUESTIONS OF LAW AS MAY BE FORMULATED BY THE
HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE
APPELLATE ORDER DATED:11/05/2016 PASSED BY THE ITAT,
'B' BENCH, BENGALURU, AS SOUGHT FOR, IN THE
RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS
No. IT(TP)A No.1614/BANG/2014.
IN ITA No.884/2017
BETWEEN:
1. PR. COMMISSIONER
OF INCOME TAX (CENTRAL)
C.R. BUILDING, QUEENS ROAD,
BENGALURU-560001
2. DY. COMMISSIONER OF INCOME TAX
CIRCLE-6(1)(2), BMTC COMPLEX,
KORAMANGALA, BENGALURU
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
AND:
- 10 -
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
1. M/S. SWISS RE GLOBAL
BUSINESS SOLUTIONS INDIA
PRIVATE LIMITED,
(FORMERLY KNOWN AS SWISS
RE SHARED SERVICES (INDIA)
PRIVATE LIMITED)
VASAWANI CENTROPOLIS,
2ND TO 6TH FLOOR, No.21,
LANGFORD ROAD, LANGFORD TOWN,
BANGALORE-560027
...RESPONDENT
(BY SRI. K. MALLAHAR RAO, ADVOCATE)
THIS ITA / INCOME TAX APPEAL IS FILED UNDER
SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF
ORDER DATED:13/04/2017 PASSED IN ITA
No.2315/BANG/2016, FOR THE ASSESSMENT YEAR 2012-2013
PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW
AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE
FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND
SET ASIDE THE APPELLATE ORDER DATED:13/04/2017
PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'B'
BENCH, BENGALURU, IN APPEAL PROCEEDINGS No. ITA No.
2315/BANG/2016 FOR ASSESSMENT YEAR 2012-13, AS
SOUGHT FOR IN THIS APPEAL.
IN ITA No.955/2017
BETWEEN:
1. PR. COMMISSIONER OF INCOME TAX-7,
C.R. BUILDINGS,
QUEENS ROAD,
BANGALORE-560 001.
2. DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-12(4)
BANGALORE
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W.
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
- 11 -
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
AND:
1. M/S. TAVANT TECHNOLOGIES INDIA PVT LTD
No.12, CSRIE-II
GUAVA GARDEN
5TH BLOCK, KORAMANGALA
BANGALORE-560095.
PAN:AABCT3261E.
...RESPONDENT
(BY SRI. T. SURYANARAYANA, SENIOR ADVOCATE FOR
SMT. TANMAYEE RAJKUMAR, ADVOCATE)
THIS ITA / INCOME TAX APPEAL IS FILED UNDER
SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF
ORDER DATED:31/05/2017 PASSED IN IT(TP)A
No.292/BANG/2014, FOR THE ASSESSMENT YEAR 2007-2008
ANNEXURE-A PRAYING TO DECIDE THE FOREGOING
QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF
LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS
DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED:
31/05/2017 PASSED BY THE INCOME TAX APPELLATE
TRIBUNAL, 'A' BENCH, BENGALURU, IN APPEAL PROCEEDINGS
IN IT(TP)A No. 292/BANG/2014 FOR ASSESSMENT YEAR 2007-
08 VIDE ANNEXURE-A, AS SOUGHT FOR IN THIS APPEAL.
IN ITA No.956/2017
BETWEEN:
1. PR. COMMISSIONER OF
INCOME TAX-7
C.R. BUILDINGS, QUEENS ROAD,
BANGALORE 560 001.
2. DEPUTY COMMISSIONER
OF INCOME TAX,
CIRCLE-12(4), BANGALORE.
...APPELLANTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
- 12 -
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
AND:
1. M/S. TAVANT TECHNOLOGIES INDIA PVT LTD
No.12, CSRIE-II, GUAVA GARDEN,
5TH BLOCK, KORAMANGALA,
BANGALORE 560095
PAN: AABCT3261E
...RESPONDENT
(BY SRI. T. SURYANARAYANA, SENIOR ADVOCATE FOR
SMT. TANMAYEE RAJKUMAR, ADVOCATE)
THIS ITA / INCOME TAX APPEAL IS FILED UNDER
SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF
ORDER DATED 31.05.2017 PASSED IN IT(TP)A No.
1592/BANG/2012, FOR THE ASSESSMENT YEAR 2008-2009,
VIDE ANNEXURE-A, PRAYING TO DECIDE THE FOREGOING
QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW
AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED
FIT AND SET ASIDE THE APPELLATE ORDER DATED
31.05.2017 PASSED BY THE INCOME TAX APPELLATE
TRIBUNAL, ‘A’ BENCH, BANGALORE, IN APPEAL PROCEEDINGS
IN IT[TP]A No.1592/BANG/2012 FOR ASSESSMENT YEAR
2008-2009, VIDE ANNEXURE-A, AS SOUGHT FOR IN THIS
APPEAL.
IN ITA.CROB No.1/2018
BETWEEN:
1. M/S. SWISS RE GLOBAL BUSINESS SOLUTIONS
INDIA PRIVATE LIMITED
(FORMERLY KNOWN AS SWISS RE SHARED
SERVICES (INDIA) PRIVATE LIMITED),
VASAWANI CENTROPOLIS,
2ND TO 6TH FLOOR,
No.21, LANGFORD ROAD,
BANGALORE - 560027.
...CROSS OBJECTOR
(BY SRI. K. MALLAHAR RAO, ADVOCATE)
- 13 -
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
AND:
1. PR. COMMISSIONER OF INCOME TAX (CENTRAL)
C.R. BULIDING, QUEENS ROAD,
BENGALURU - 560001.
2. DY. COMMISSIONER OF INCOME TAX
CIRCLE 6(1)(2)
BMTC BUILDING, KORMANGALA,
BENGALURU-560001.
...RESPONDENTS
(BY SRI. N. VENKATARAMAN, ASG A/W
SRI. E. I. SANMATHI, SENIOR STANDING COUNSEL A/W.
SRI. SUSHAL TIWARI & SRI. M. DILIP, STANDING COUNSEL)
THIS ITA.CROB IS FILED UNDER ORDER 41 RULE 22 OF
THE CPC, ARISING OUT OF ORDER DATED: 13.04.2017
PASSED IN IT[TP]A NOS. 2315/BANG/2016, FOR THE
ASSESSMENT YEAR 2012-2013, VIDE ANNEXURE-A, PRAYING
TO DISMISS THE APPEAL FILED BY REVENUE TO ANSWER THE
SUBSTANTIAL QUESTION OF LAW IN FAVOUR OF
APPELLANT/CROSS OBJECTOR; ALTERNATIVELY ADMIT
PRESENT CROSS OBJECTION AND UPHOLD EXCLUSION OF
COMPANIES AS COMPARABLES AS HELD THE IMPUGNED
ORDER AT ANNEXURE-'A' PASSED BY THE INCOME-TAX
APPELLATE TRIBUNAL DATED: 13.04.2017 IN IT(TP)A NOS.
2315/BANG/2016 FOR ASSESSMENT YEAR: 2012-2013
KEEPING IN VIEW ENTIRETY OF FACTS AND LAW ETC.
THESE APPEALS AND CROSS OBJECTION HAVING BEEN
HEARD AND RESERVED FOR JUDGMENT, COMING ON FOR
PRONOUNCEMENT THIS DAY, K.V. ARAVIND J., DELIVERED
THE FOLLOWING:-
- 14 -
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
CORAM: HON'BLE MR. JUSTICE S.G.PANDIT
and
HON'BLE MR. JUSTICE K. V. ARAVIND
C.A.V. JUDGMENT
(PER: HON'BLE MR. JUSTICE K.V. ARAVIND)
Heard Sri K.K. Chythanya, learned Senior Counsel for
Sri S. Sharath, learned counsel; Sri T. Suryanarayana, learned
Senior Counsel for Smt. Tanmayee Rajkumar, learned counsel;
Sri K.K. Mallahar Rao, learned counsel; Sri D.D. Nageswar Rao,
learned counsel for the respective assesses; also heard Sri N.
Venkataraman, learned Additional Solicitor General of India
(ASG) along with Sri E.I. Sanmathi, learned Senior Standing
Counsel along with Sri Sushal Tiwari and Sri M. Dilip, learned
Standing Counsel for the revenue.
2. These appeals are filed under Section 260-A of the
Income Tax Act, 1961 (for short, ‘the Act’). These appeals were
admitted to consider the following substantial questions of law:
In ITA No.10/2011
“20.5 Whether the Hon'ble ITAT was right in law in
excluding comparable companies with negative
margins while holding companies with super normal
profits as not comparable with the Appellant? Hinuja &
Aftek
- 15 -
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
20.6 Whether the Hon'ble ITAT was correct in law, in
allowing benefit of ± 5 per cent under the proviso to
Section 92C(2) by adding 5 per cent to the profit
margin of the Appellant instead of applying the same to
the arithmetic mean of ALP?
20.7 Whether the Hon'ble ITAT was right in law in
excluding comparable companies having margin below
6 per cent and in holding that Function, Assets and
Risk analysis does not make out compatibility for
comparison?
20.8 Whether the Hon'ble ITAT ought to have made
suitable adjustments to the ALP for differences in the
risk profile of the comparable companies vis-à-vis the
Appellant?
20.9 Whether the Hon'ble ITAT was right in accepting
Satyam Computers Limited ("Satyam") as a
comparable, despite public knowledge of unreliability
and falsification of its audited financial statements?
20.10 Whether the Hon'ble ITAT was right in treating
donations as operating in nature and adding the same
to the operating cost, and excluding income tax refund
from the operating income for the purpose of
computing the net margin of the Appellant?”
In ITA No.23/2011 and ITA No.24/2011
“a. "Whether under the facts and circumstances of the
case, the tribunal is justified in law in including foreign
exchange gain as part of operating revenues even
though foreign exchange gain is not releted to the
business operations of the company and is dependent
on external factors like money supply, inflation, Govt.
policy etc.,?
b. "Whether under the facts and circumstances of the
case, the tribunal is justified in law in equating
business income / sales with operating revenues and
thus concluding that foreign exchange gain forms part
of operating revenues even when the same is not
permissible under law"?
- 16 -
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
c. "Whether on the facts and circumstances of the case
the tribunal is justified in law in concluding that the
assessee company is a risk mitigated entity without
appreciating the facts of the case that the assessee
company is also assuming risks like single customer
risk and political country risks, which otherwise are not
assumed by the comparable companies selected by the
TPO / AO.
d. "Whether on the facts and circumstances of the case
tribunal is justified in law in rejecting Hinduja TMT Ltd.,
and Aftek Infosys Ltd., as a comparable stating that
these companies earned super profits without
mentioning the bench marked for profitability above
which a company can be considered as earning super
profits in the software services industry in which the
taxpayer is operating"?.
e. "Whether the tribunal is justified in law in rejecting
Hinduja TMT Ltd. and Aftek Infosys Pvt. Ltd., as a
comparable stating that these companies earned super
profits without mentioning any peculiar economic
circumstances that resulted so called high / super
profits"?
f. "Whether tribunal is right in law in holding that arm's
length price adjustment is to be made only after
allowing +/-5% from the arithmetic mean price as per
the proviso to section 92C(2) even when the price
charged by the assessee falls beyond +/-5% from the
arithmetic mean price"?.
g. "Whether tribunal is right in law in holding that
arm's length price adjustment is to be made only after
allowing +/-5% from the arithmetic mean price as per
the proviso to section 92C(2) even when they said
proviso is amended to clarify the position as it was"?.
h. "Whether the tribunal is right in law in holding that
the amended proviso to Section 92C(2) is not
applicable to the A.Y.2003-04 as the amendment is
made effective from 01-10-2009 even though it is a
clarificatory amendment as evidenced by Memorandum
to the Finance Bill (2) of 2009"?.
- 17 -
ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
i. "Whether the tribunal erred in rejecting Geometric
Software Solutions Co. Ltd., as a comparable, without
giving any valid reasons and also when the company is
functionally similar to the assessee"?.”
ITA No.44/2015
“(1) "Whether, the Tribunal, on the facts and in the
circumstances of the case was right in excluding Lucid
Software Ltd.. Celestial Labs Ltd., and KALS
Information Systems Ltd.. Avani Cincom Technology
Ltd., Thirdwor Solutions Ltd., Persistent Systems Ltd.,
Quintegra Solutions Ltd., Softsel India Ltd., Tata Elxsi
Ltd.. Infosys Ltd and Wipro Ltd from the list of
comparables holding that they are functionally different
without appreciating that the comparables satisfy all
the qualitative and quantitative filters applied by the
TPO and that selection of comparables in a case
depends on assessee specific FAR analysis?"
(2) "Whether, the Tribunal, on the facts and in the
circumstances of the case was right in excluding Lucid
Software Ltd., Celestial Labs Ltd., and KALS
Information Systems Ltd., Avani Cincom Technology
Ltd., Thirdware Solutions Ltd., Persistent Systems Ltd.,
Quintegra Solutions Ltd., Softsel India Ltd., Tata Elxsi
Ltd., Infosys Ltd and Wipro Ltd by relying on the
decision of the Bangalore Tribunal in the case of 3DPLM
Software solutions Ltd., and not deciding the selection
of the comparables on the basis of specific facts
brought on record by the TPO?"
3) "Whether the Hon'ble Tribunal is justified in directing
the AO to recomputed the deduction under section 10A
after reducing an amount of Rs.1,26,19,649/- incurred
on telecommunication expenses, insurance and
traveling expenses incurred in foreign currency from
the total turnover also, without appreciating that there
is no provision in section 10A that such expenses
should be reduced from the total turnover, as clause
(iv) of the Explanation to section 10A provides that
such expenses are to be reduced only from the export
turnover ?"
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
(4) "Whether the Tribunal was justified, on the facts
and in the circumstances of the case, in allowing relief
to the assessee relying on the decision of the Hon'ble
High Court, which has not reached its finality and a SLP
has been filed against such order on this issue in the
case of Tata Elxsi Ltd 349 ITR 98?"”
ITA No.128/2015
“(1) "Whether, the Tribunal, on the facts and in the
circumstances of the case was right in excluding M/s.e-
Zest Solutions Ltd., from the list of comparables
holding that this company is functionally different
without appreciating that the comparable satisfy all the
qualitative and quantitative filters applied by the TPO
and that selection of comparable in a case depends on
assessee specific FAR analysis?"
(2) "Whether, the Tribunal, on the facts and in the
circumstances of the case was right in excluding M/s.
e-Zest Solutions Ltd., by relying on the decision of the
Bangalore Tribunal in the case of 3DPLM Software
Solutions Ltd., and not deciding the selection of the
comparable on the basis of specific facts brought on
record by the TPO?"
(3) "Whether, the Tribunal, on the facts and in the
circumstances of the case was right in holding that
foreign exchange loss / gain is operating in nature
without ascertaining the nexus of the forex gain / loss
with the business activity of the taxpayer and without
appreciating that such loss /gain though attributable to
the operating activity is not derived from the operating
activity" and;
(4) "Whether, the Tribunal, on the facts and in the
circumstances of the case was right in concluding that
forex gain / loss are to be treated as operating in
nature without appreciating that though they may be
incidental to the operating activity, they cannot be
deemed as operating in nature since, they are not
critical to operational activities of the business
conducted by the taxpayer?".”
In ITA No.469/2015
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
“(2)"Whether on the facts and circumstances of the
case, the Tribunal has erred in directing to include
forex gain / loss as part of operating revenue without
ascertaining the nexus with the business activity of the
taxpayer?"”
In ITA No.492/2016
“(1)"Whether on the facts and in the circumstances of
the case, the is right in directing the assessing
authority to include the foreign exchange fluctuation
loss or gain as part of the operating income / loss
without ascertaining the nexus with the business
activity and even when the same cannot be deemed as
operating in nature, since they are not critical to
operationally activities of the business conducted by
the assessee?"
(2) "Whether on the facts and in the circumstances of
the case, the Tribunal is right in directing the TPO to
exclude both M/s.Bodhtree Consulting Ltd and Infosys
Ltd., as comparables by holding that the said
companies are functionally different from the assessee
- company even when the said comparables satisfy all
the qualitative and quantitative filters applied by the
TPO and the Tribunal has selectively applied the
modified qualitative filter to only few comparables
challenged by the assessee?"
(3) "Whether on the facts and in the circumstances of
the case, the Tribunal is right in allowing the market
loss in respect of assessee's SEZ units by erroneously
holding that the market loss is neither speculative nor
contingent in nature when the said market loss is not
allowable as per CBDT Instruction No.3/2010 dated:
20-03-2010 as actual losses are allowable as non-
speculative only if the transactions qualify as eligible
derivative transactions under clause (d) of proviso to
section 43(5) of the Act?"
(4) "Whether on the facts and in the circumstances of
the case, the Tribunal is right in holding that the
assessee's claim for loss on account of forward
contracts in Forex derivatives of Rs.5,88,66,157/- and
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
setting it off against forex gain from the other
component is allowable when the assessee is not falling
under the category of 'engaged in eligible transactions'
in respect of trading in derivatives as envisaged in
clause (ac) of section 2 of the Securities Contracts
(Regulations) Act, 1965, carried out in recognised
Stock Exchange and further the transaction does not
fall under the definition 'speculative transaction'
provided in section 43(5) of the Act?"
(5) "Whether on the facts and in the circumstances of
the case, the Tribunal is right in holding that section
10A is an exemption section although sections 10A and
10B as substituted by Finance Act, 2000, provide for
'deduction' of the profits and gains derived from the
export of articles, eventhough it is placed in Chapter
III, section 10A begins with sentence' subject to the
provisions of this section, the deduction ......'?"
In ITA No.514/2016
“(2) "Whether on the facts and in the circumstances of
the case, the Tribunal was right in excluding
comparables such as Accentia Technologies Ltd, Cosmic
Global Ltd and Eclerx Services as comparables by
following its earlier decisions eventhough the said
companies are functionally similar and the decisions
relied upon by the Tribunal have not reached finality?"
(3) "Whether on the facts and in the circumstances of
the case, the Tribunal was right in excluding
comparables such as Tata Elaxy Ltd,
Infosys Technologies Ltd, as comparables by following
its earlier decisions eventhough the Transfer Pricing
Officer has properly chosen the comparables since all
the required tests are satisfied in the case of the
assessee ?"
(4) "Whether on the facts and in the circumstances of
the case, the Tribunal was right in directing the AO /
TPO to give working capital adjustments after
considering the adjustments of the assessee as well as
after exclusion of the companies as directed by it by
following the decisions in the case of M/s.Citrix
Research and Development India Pvt. Ltd., even
though the said decision has not reached finality ?"”
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
In ITA No.884/2017 c/w. ITA Crob.1/2018
”"Whether on the facts and in the circumstances of the
case, the Tribunal was right in excluding comparable's
namely, M/s, Universal Print Systems Ltd, Informed
Technologies India Ltd, Infosys BPO Ltd,
M/s.Microgenetics Systems Ltd, TCS E-Serve Ltd and
BNR Udyog Ltd contrary to its own earlier decisions in
cases of M/s. Societe General Global Solution Centre
Pvt.Ltd and also in case of Vmoksha Technologies
Pvt.Ltd and all the required tests were satisfied in case
of the comparable's chosen by TPO"?”
ITA Crob.1/2018
“a) Whether Hon'ble Tribunal order can be said to be
perverse to the extent it does not adjudicate upon
functional comparability and other objections raised
with respect to the exclusion of Universal Print System
Limited (segmental), Infosys BPO Limited, TCS E-Serve
Limited and BNR Udyog Ltd from final list of
comparables,?
b) Whether Hon'ble Tribunal erred in not adjudicating
upon exclusion of Excel Infoways Limited (segmental)
from final list of comparables on the basis of functional
dissimilarity, exceptional year of operations and failing
filter applied by the Ld. TPO himself?”
In ITA No.955/2017 and In ITA No.956/2017
“1)"Whether on the facts and in the circumstances of
the case, the Tribunal is right in law in directing the
assessing authority or TPO The Tribunal also gives
relief to assessee by directing assessing
authority/transfer pricing officer to adopt RPT filter of
15%"?.
(2) "Whether on the facts and in the circumstances of
the case, the Tribunal is right in law in excluding
certain comparables on the basis of functional
dissimilarity even when the assessing authority has
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
applied qualitative and quantitative tests and the
Tribunal failed to appreciate the FAR analysis brought
on record by the TPO?"”
A. GENESIS OF THE DISPUTE:
3. The assessee filed the return of income, and the same
was selected for scrutiny assessment based on the disclosures
made by the assessee and the transfer pricing study furnished
by the assessee in respect of the transactions with the
Associated Enterprises (AE). The Assessing Officer (AO)
referred the matter to the Transfer Pricing Officer (TPO) for
determination of the Arm's Length Price (ALP). The TPO, upon
considering the transfer pricing study and determining the ALP
by applying various prescribed filters, made adjustments to the
ALP.
3.1 The AO, giving effect to the ALP determined by the TPO,
passed a draft assessment order. The draft assessment order
was forwarded to the assessee incorporating the adjustments
made by the TPO. The assessee had the option either to accept
the draft assessment order or to file objections before the
Dispute Resolution Panel (DRP). If the draft assessment order
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
was accepted, the assessee had the remedy of filing an appeal
before the Commissioner of Income Tax (Appeals). Where
objections were filed, the DRP, upon considering the objections,
issued necessary directions to the AO. The directions included
variations in the transfer pricing study and the determination of
the ALP. The AO, by giving effect to the directions issued by the
DRP, passed the final assessment order in conformity with the
said directions.
3.2 Against the directions of the DRP, the determination of
the ALP by the TPO, and the final assessment order, the
assessee exercised the remedy of filing an appeal before the
Tribunal. The Tribunal determined the correctness or otherwise
of the ALP and also directed appropriate adjustments. Against
the order passed by the Tribunal, an appeal is provided under
Section 260-A of the Act at the instance of either the Revenue
or the assessee.
3.3 The assessee and the Revenue preferred appeals before
this Court. These appeals were decided by this Court on:
SL. NO. CASE NO. DECIDED ON
1. ITA 10/2011 09.07.2018
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
2. ITA 23/2011 09.07.2018
3. ITA 24/2011 09.07.2018
4. ITA 44/2015 16.07.2018
5. ITA 128/2015 16.07.2018
6. ITA 469/2015 19.07.2018
7. ITA 492/2016 01.10.2021
8. ITA 514/2016 28.06.2018
9. ITA 884/2017 c/w. ITA Crob.1/2018 26.06.2018 /
14.08.2018
10. ITA 955/2017 28.08.2018
11. ITA 956/2017 28.08.2018
3.4 The said judgments were carried in appeal by the
assessee/Revenue before the Hon'ble Supreme Court. The
Hon'ble Supreme Court, in the case of SAP Labs India (P)
Ltd. v. Income Tax Officer (and other appeals), [2023]
454 ITR 121 (SC) / [2023] 149 taxmann.com 327 (SC),
remitted the matters to the High Court for fresh consideration
with a direction to decide and dispose of the appeals afresh in
the light of the observations made therein.
3.5 The Hon'ble Supreme Court directed the High Court to
examine, in each case, whether, while determining the Arm's
Length Price, the provisions of the Act and the Rules governing
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
transfer pricing had been duly followed and whether the
findings recorded by the Tribunal in determining the ALP were
perverse. For the sake of convenience, the relevant paragraphs
of the judgment are extracted below:
“… Therefore, the short question which is posed for the
consideration of this Court is, whether in every case
where the Tribunal determines the arm's length price,
the same shall attain finality and the High Court is
precluded from considering the determination of the
arm's length price determined by the Tribunal, in
exercise of powers under section 260A of the Act?
6. While determining the aforesaid issue, the relevant
provisions for determining the arm's length price under
the IT Act are required to be referred to.
Section 92-C which is relevant, for the purpose of
determining ALP inter alia, reads as follows:
"92C. (1) The arm's length price in relation to an
international transaction [or specified domestic
transaction] shall be determined by any of the
following methods, being the most appropriate
method, having regard to the nature of transaction
or class of transaction or class of associated
persons or functions performed by such persons or
such other relevant factors as the Board may
prescribe, namely : —
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed
by the Board.
(2) The most appropriate method referred to in
sub section (1) shall be applied, for determination
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
of arm's length price, in the manner as may be
prescribed:
Provided that where more than one price is
determined by the most appropriate method, the
arm's length price shall be taken to be the
arithmetical mean of such prices:
**
(3) Where during the course of any proceeding for
the assessment of income, the Assessing Officer is,
on the basis of material or information or
document in his possession, of the opinion that—
(a) the price charged or paid in an
international transaction [or specified domestic
transaction] has not been determined in
accordance with sub-sections (1) and (2); or
(b) any information and document relating to
an international transaction [or specified domestic
transaction] have not been kept and maintained by
the assessee in accordance with the provisions
contained in sub-section (1) of section 92D and
the rules made in this behalf; or
(c) the information or data used in
computation
of the arm's length price is not reliable or correct;
or
(d) the assessee has failed to furnish, within
the specified time, any information or document
which he was required to furnish by a notice issued
under sub section (3) of section 92D, the
Assessing Officer may proceed to
determine the arm's length price in relation to the
said international transaction [or specified
domestic transaction] in accordance with sub-
sections (1) and (2), on the basis of such material
or information or document available with him:
Provided that an opportunity shall be given by
the Assessing Officer by serving a notice calling
upon the assessee to show cause, on a date and
time to be specified in the notice, why the arm's
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
length price should not be so determined on the
basis of material or information or document in the
possession of the Assessing Officer."
20. Section 92C(1) thus visualizes determination
of the "arms-length price" (ALP) by any of five
enumerated methods, "being the most appropriate
method", having regard to the "nature of
transaction or class of transaction or class of
associated persons or functions performed by such
persons or such other relevant factors as the board
may prescribe, namely (a) comparable
uncontrolled price method, (b) resale price
method, (c) cost + method, (d) profit split
method, (e) transactional net margin method, (f)
any such other method as may be prescribed by
the board. Where more than one price is
determined by the most appropriate method, the
arm's length price shall be taken to be arithmetical
mean of such prices."
21. Rule 10B of the Rules prescribes the
determination of arm's length price under section
92C. The first step in all methods is evaluation of
differences between the international transaction
undertaken with the "unrelated enterprise
performing the comparable functions" in similar
circumstances. Rule 10B of the Income-tax Rules
inter alia, provides for various methods for
determination of the arm's length price. Rule
10B(1)(e) prescribes the "transactional net margin
method" (TNMM) with which the present case is
concerned. Rule 10B(1)(e) (i) is as under:
"10B. (1) Determination of arm's length price
under section 92C:—
**
(e) transactional net margin method, by
which,—
(i) the net profit margin realised by the
enterprise from an international transaction
entered into with an associated enterprise is
computed in relation to costs incurred or sales
effected or assets employed or to be employed
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
by the enterprise or having regard to any other
relevant base."
7. Therefore, while determining the arm's length price,
the Tribunal has to follow the guidelines stipulated
under Chapter X of the IT Act, namely, Sections 92, 92A
to 92CA, 92D, 92E and 92F of the Act and Rules 10A to
10E of the Rules. Any determination of the arm's length
price under Chapter X de hors the relevant provisions of
the guidelines, referred to hereinabove, can be
considered as perverse and it may be considered as a
substantial question of law as perversity itself can be
said to be a substantial question of law. Therefore, there
cannot be any absolute proposition of law that in all
cases where the Tribunal has determined the arm's
length price the same is final and cannot be the subject
matter of scrutiny by the High Court in an appeal under
section 260A of the IT Act. When the determination of
the arm's length price is challenged before the High
Court, it is always open for the High Court to consider
and examine whether the arm's length price has been
determined while taking into consideration the relevant
guidelines under the Act and the Rules. Even the High
Court can also examine the question of comparability of
two companies or selection of filters and examine
whether the same is done judiciously and on the basis
of the relevant material/evidence on record. The High
Court can also examine whether the comparable
transactions have been taken into consideration
properly or not, i.e., to the extent non-comparable
transactions are considered as comparable transactions
or not. Therefore, the view taken by the Karnataka High
Court in the case of Softbrands India (P.) Ltd. that in
the transfer pricing matters, the determination of the
arm's length price by the Tribunal is final and cannot be
subject matter of scrutiny under section 260A of the IT
Act cannot be accepted.
8. Thus, in each case, the High Court should examine
whether the guidelines laid down in the Act and the
Rules are followed while determining the arm's length
price. Therefore, we are of the opinion that the absolute
proposition of law laid down by the Karnataka High
Court in the case of Softbrands India (P.) ltd. (supra)
that in the matter of transfer pricing, determination of
the arm's length price by the Tribunal shall be final and
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
cannot be subject matter of scrutiny and the High Court
is precluded from examining the correctness of the
determination of the arm's length price by the Tribunal
in an appeal under section 260A of the IT Act on the
ground that it cannot be said to be raising a substantial
question of law cannot be accepted. As observed
hereinabove, within the parameters of section 260A of
the IT Act in an appeal challenging the determination of
the arm's length price, it is always open for the High
Court to examine in each case whether while
determining the arm's length price, the guidelines laid
down under the Act and the Rules, referred to
hereinabove, are followed or not and whether the
determination of the arm's length price and the findings
recorded by the Tribunal while determining the arm's
length price are perverse or not.
9. In view of the above, the impugned judgments and
orders passed by the High Court dismissing the
Revenue's appeals and even the appeals preferred by
the assessees are required to be quashed and set aside
and the matters are required to be remitted back to the
concerned High Courts to decide and dispose of the
respective appeals afresh in light of the observations
made hereinabove and examine in each and every case
whether the guidelines laid down under the Act and the
Rules, referred to hereinabove, are followed while
determining the arm's length price by the Tribunal or
not and to that extent whether the findings recorded by
the Tribunal while determining the arm's length price
are perverse or not.
10. In view of the above and for the reasons stated
above, all these appeals are allowed. The impugned
judgments and orders passed by the respective High
Courts are hereby quashed and set aside. The matters
are remitted back to the respective High Courts to
decide and dispose of the appeals afresh in light of the
observations made hereinabove and to examine
whether in each case while determining the arm's length
price the guidelines laid down under the Act and the
Rules, referred to hereinabove, are followed or not and
whether the findings recorded by the Tribunal while
determining the arm's length price are perverse or not.
The aforesaid exercise be completed, preferable within a
period of nine months from the date of receipt of the
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
present order by the respective High Courts. It is
specifically observed that we have not entered into the
merits of the cases at all and we have not expressed
anything on the determination of the arm's length price
in case of respective assessees, either in favour of the
assessees or in favour of the Revenue. It is ultimately
for the concerned High Court to take a fresh decision, as
observed hereinabove.”
3.6 In the consequence of the remand, these appeals are
before us. The issues involved in all these appeals largely
pertain to the determination of the Arm's Length Price by the
Transfer Pricing Officer.
B. THE RIVAL CONTENTIONS:
4. Sri N. Venkataraman, learned Additional Solicitor General
of India (ASG), appearing for the Revenue, made the following
submissions:
4.1 The concept of transfer pricing was introduced to curb tax
avoidance arising from the increasing participation of
multinational groups in economic activities, which gave rise to
complex issues relating to transactions between two or more
enterprises belonging to the same multinational group. The
transfer pricing regime became necessary on account of the
control exercised over the business activities of such
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C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
enterprises by multinational groups, which could manipulate
the prices charged and paid in intra-group transactions, thereby
leading to erosion of tax revenues.
4.2 With reference to the provisions of Chapter X of the Act,
the primary onus of preparing and furnishing the transfer
pricing study, based on the characterization of the assessee, a
fair presentation of Functions, Assets and Risks (FAR) analysis,
and a truthful preparation of segmental margins, rests upon the
assessee. The burden is on the assessee to furnish the transfer
pricing study report based on correct facts after conducting a
proper and quality transfer pricing analysis. The obligation to
maintain the requisite data and to justify the correctness of the
analysis is on the assessee and cannot, under any
circumstances, shift to the Revenue, as held by the Tribunal.
4.3 Where the transfer pricing study and the determination of
the ALP are found to be inconsistent with the methodology
prescribed under the Act and Rule 10B of the Income Tax
Rules, 1962 (for short ‘the Rules’), it is incumbent upon the
TPO to undertake a fresh transfer pricing analysis in accordance
with the prescribed provisions. For the purpose of determining
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ITA No. 10 of 2011
C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
the ALP, the comparability analysis may appropriately be
carried out at the entity or enterprise level wherever the facts
and circumstances so warrant.
4.4 In consonance with Rule 10D of the Rules, the assessee is
required to maintain the prescribed information and documents
in respect of international transactions entered into by it, and
that the transfer pricing study must conform to such
information and documents. Maintenance of such information
and documents is of paramount importance since the entire
transfer pricing study is data-driven. The transfer pricing study
prepared by the assessee should strictly comply with all the
requirements contemplated under Rule 10D.
4.5 With reference to Rule 10E of the Rules, particulars not
disclosed in Form No. 3CEB as prescribed under the Rules
cannot subsequently be altered. Unless the transfer pricing
study conforms to the statutory provisions and the Rules, the
interference by the TPO in undertaking an independent transfer
pricing analysis on the basis of the available data is fully
justified.
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C/W ITA No. 23 of 2011
ITA No. 24 of 2011
AND 9 OTHERS
4.6 The amendment introduced by the Finance Act, 2012, by
insertion of sub-section (2A) to Section 92C, is retrospective in
nature and is applicable to all pending cases.
4.7 In the case of international transactions, foreign
exchange gain or loss cannot be treated as a relevant factor for
determining the ALP unless such gain or loss is inextricably
linked to the international transaction itself. With reference to
Rule 10B, the operating expenses or losses arising on account
of foreign exchange fluctuation, as well as operating revenue
arising on account of foreign currency fluctuation, are liable to
be excluded from the operating cost or operating revenue, as
the case may be. It is submitted that the character of foreign
exchange gain or loss, whether operating or non-operating,
depends upon its functional nexus with the business activity.
4.8 The working capital adjustment is permissible only for
neutralizing the impact of differences in the working capital
levels between the tested party and the comparable
uncontrolled companies and only to the extent contemplated
under Rule 10B(3). The burden lies upon the assessee to
establish the necessity for such adjustment by demonstrating
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the existence of material differences in working capital levels,
the direct and quantifiable impact of such differences on the
operating margins, and that the proposed adjustment is based
on reliable data.
4.9 With reference to the distinction between controlled and
uncontrolled transactions, the Related Party Transaction Filter is
merely a preliminary screening tool intended to reduce a large
universe of potential comparables to a smaller and manageable
set. The determination of whether an enterprise is controlled or
uncontrolled is an independent exercise to be undertaken by
both the assessee and the TPO with reference to the tests
prescribed under Section 92A of the Act. The application of a
rigid 15% RPT Filter is incorrect and that the filter should be
applied in a flexible and pragmatic manner.
4.10 While selecting comparables, once the requirements of
Rule 10B are satisfied, the size or turnover of the comparable
company does not, by itself, alter the profit margin and,
therefore, the turnover of the comparable company becomes
immaterial.
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4.11 The Tribunal cannot permit the assessee to introduce new
comparables or seek inclusion or exclusion of comparables in
the absence of the relevant particulars having been disclosed in
Form No. 3CEB, as such a course would deprive the TPO of the
opportunity to examine the same.
4.12 While directing inclusion or exclusion of any comparable,
the Tribunal must satisfy itself that the prescribed statutory
requirements governing the selection of comparables are
fulfilled, failing which the mandate of Rule 10B would remain
unfulfilled. The determination of the ALP is based upon the
financial data of the comparable companies for the relevant
previous year. If the inclusion or exclusion of any comparable
by the Tribunal, whether in the case of the assessee or in any
other case, results in an outcome contrary to the requirements
of Rule 10B, the same would lead to an absurd result.
4.13 Any procedural infirmity in the consideration of inclusion
or exclusion of comparables by the Tribunal, or any violation of
the statutory provisions governing such exercise, would render
the findings of fact perverse, thereby giving rise to a
substantial question of law. Once perversity is demonstrable
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from the order of the Tribunal, the specific pleadings or
independent demonstration of perversity become unnecessary,
as this Court is empowered to frame such substantial question
of law in exercise of its jurisdiction under Section 260-A of the
Act.
5. Sri K.K. Chythanya, learned Senior Counsel appearing for
the assessee, made the following submissions:
5.1 The selection of comparables and the choice of filters are
essentially fact-based exercises and do not give rise to a
substantial question of law unless perversity is pleaded and
established. In the absence of the Revenue specifically
contending that the findings recorded by the Tribunal are
perverse and demonstrating the same, the findings of the
Tribunal continue to remain findings of fact. The questions
raised by the Revenue do not even remotely plead perversity so
as to constitute a substantial question of law.
5.2 As held by the Hon'ble Supreme Court in SAP Labs India
(P) Ltd. (supra), the High Court is required to examine
whether the provisions of the Act and the Rules governing
transfer pricing have been followed and whether the findings
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recorded by the Tribunal are perverse. In the present appeals
filed by the Revenue, the substantial questions of law do not
even suggest any violation of the provisions of the Act or the
Rules in the course of selection of comparables or application of
filters. Mere bald assertions that the findings recorded by the
Tribunal are incorrect, are insufficient to give rise to a
substantial question of law on the ground of perversity.
5.3 The concept of transfer pricing is to determine the
notional profit in the hands of the assessee. Therefore, where
the Revenue seeks to disturb the transfer pricing study
undertaken by the assessee, it must exercise greater caution
and strictly adhere to the provisions of the Act and the Rules
while undertaking such exercise through the TPO. Transfer
pricing is not an exact science but is a fact-based exercise
involving estimation. In such a data-driven exercise, a
reasonable degree of tolerance is implicit and ought to be
recognised. The object of transfer pricing is only to benchmark
the price charged by the assessee to its Associated Enterprises
(AE) with the ALP.
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5.4 There is no estoppel preventing the assessee from
introducing new comparables before the Tribunal. The selection
of comparables by the assessee is initially based upon the
database then available. However, at a later stage, either
before the TPO or before the Tribunal, better comparables may
become available on account of updated data. Such availability
of better and updated data should not preclude the inclusion or
exclusion of comparables at the appellate stage, having regard
to the object of transfer pricing, namely, benchmarking the
price. Whenever new comparables are sought to be included or
excluded before the Tribunal, the Tribunal either decides the
issue based on precedent relating to such comparables or
remands the matter to the TPO for fresh determination of the
ALP. In either event, no prejudice is caused to the Revenue.
5.5 With reference to the proviso to Rule 10B(5), the Rule
permits the TPO to use subsequent data which was not
available as on the date of filing of the return, and the same
principle should equally enure to the benefit of the assessee. In
the absence of such flexibility, it would result in collection of tax
otherwise than in accordance with law, contrary to Article 265
of the Constitution of India.
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5.6 Section 92C mandates determination of the ALP by the
TPO based on the transfer pricing study furnished by the
assessee. Sub-section (3) of Section 92C empowers the TPO to
reject the ALP determined by the assessee and undertake a
fresh transfer pricing analysis. During such exercise, it is
equally permissible for the assessee to seek exclusion of
companies selected by the TPO. Where the transfer pricing
study prepared by the assessee is under consideration, the
burden is undoubtedly on the assessee to establish its
correctness before the TPO or the Tribunal. However, once the
transfer pricing study of the assessee is rejected and a fresh
transfer pricing analysis is undertaken by the TPO, the burden
shifts to the TPO to justify such analysis. The Revenue has
incorrectly understood the Tribunal's findings as placing the
entire burden upon the Revenue. Since the transfer pricing
analysis undertaken by the TPO is itself under challenge before
the Tribunal, the burden necessarily remains upon the Revenue
to justify its correctness.
5.7 The exercise of determining comparability commences
with a proper Functional, Assets and Risks (FAR) analysis. Once
the threshold of a proper FAR analysis is crossed and a
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company is found either suitable or unsuitable as a comparable,
the findings recorded in another case relating to the same
comparable can legitimately be applied, since the qualitative
characteristics of such comparable company ordinarily remain
unchanged even if examined in different cases.
5.8 The transfer pricing study undertaken by the assessee is
often disturbed by the TPO by adopting a standard set of
comparables across different assessees without carrying out an
independent FAR analysis. Year after year, the same set of
companies engaged in software development services is
adopted across different assessees merely to alter the ALP
determined by the assessee, which demonstrates non-
application of mind by the TPO. Such adoption of a standard set
of comparables, without an independent comparability analysis,
is contrary to Rule 10B of the Rules.
5.9 The foreign exchange gain or loss, where directly linked
to business operations, constitutes an operating item. Foreign
exchange gain or loss arising from export or import
transactions, having a direct nexus with the business
operations, is incidental to such operations and therefore forms
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part of the operating revenue or operating expenditure, as the
case may be. Once such gain or loss is inextricably linked with
the business operations, it is "derived from" the business and
cannot merely be regarded as "attributable to" the business.
5.10 The Safe Harbour Rules do not override the provisions of
Rule 10B of the Rules.
5.11 With regard to the Related Party Transaction (RPT) Filter,
different thresholds may be applied depending upon the
availability of reliable comparables. Where a sufficient number
of reliable comparables are available by applying a 15% RPT
Filter, adoption of a higher threshold would be inappropriate. A
lower RPT threshold provides a better benchmark since the
influence of related party transactions on the profitability of the
comparable companies is comparatively lower. A 25% RPT
Filter may be resorted to only where an adequate number of
comparables satisfying a lower RPT threshold are not available.
5.12 Large companies possess significant brand value, greater
bargaining power, valuable Intellectual Property Rights (IPRs),
and the ability to command higher margins, all of which
materially influence their profitability. Therefore, the size of the
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comparable company assumes considerable significance in
comparability analysis, as larger companies enjoy several
advantages, including economies of scale, competitive pricing
capabilities, a larger workforce, and comparatively lower
vulnerability to market competition and fluctuations. The size of
the comparable company should therefore remain within
reasonable tolerance limits. The Tribunal rightly adopted an
upper turnover filter of Rs.200 crores while considering
companies having turnover between Rs.1 crore and Rs.200
crores. The said turnover filter is based on a rational and logical
classification evolved by the expert Tribunal. In the absence of
any statutory prohibition, such a view cannot be characterised
as perverse so as to give rise to a substantial question of law.
6. Sri T. Suryanarayana, learned Senior Counsel, in addition
to the submissions advanced by Sri K.K. Chythanya, learned
Senior Counsel for the assessee, made the following
submissions:
6.1 The computation of the ALP, the selection of uncontrolled
comparables, the application of appropriate filters where exact
comparables are not available, the determination of the ALP,
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and the computation of the arithmetic mean are all matters of
estimation based on data. Consequently, the findings recorded
by the Tribunal on such issues remain findings of fact unless a
specific violation of any provision of the Act or the Rules is
pleaded and demonstrated so as to give rise to a substantial
question of law for consideration by this Court.
6.2 In the absence of any demonstrated violation of the
provisions of the Act or the Rules in the process of selection of
comparables, whether by inclusion or exclusion, application of
filters, determination of the ALP, or consideration of various
business segments, the order of the Tribunal cannot be said to
be perverse so as to give rise to a substantial question of law
requiring consideration by this Court.
6.3 The determination of the ALP is essentially a fact and
data-driven exercise and not one governed by any scientific
formula. Therefore, no uniform or standard yardstick can be
prescribed by this Court for such determination.
7. Sri D.D. Nageshwar Rao, learned counsel appearing for
the assessee, made the following submissions:
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7.1 When the findings recorded by the Tribunal are fact-
based, and the Tribunal is the final fact-finding authority, every
erroneous finding of fact does not amount to perversity unless
the same is specifically pleaded and demonstrated before the
Court. In the appeals filed by the Revenue, there is no such
pleading, nor has any perversity been demonstrated by the
Revenue.
7.2 Even as per the judgment of the Coordinate Bench of this
Court in Pr. CIT v. Softbrands India (P.) Ltd. [(2018) 406
ITR 513 (Kar)], the High Court is required to examine
whether the provisions of the Act and the Rules governing
transfer pricing have been complied with. Unless any violation
of the provisions of the Act or the Rules is demonstrated, the
substantial questions of law raised by the Revenue in the
memorandum of appeal continue to remain questions of fact. A
mere error in a finding of fact is insufficient to give rise to a
substantial question of law warranting interference by this
Court.
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7.3 No further guidelines are required to be laid down, as the
issues have already been considered by other High Courts and,
in any event, are essentially fact-based.
7.4 Once the TPO rejects the transfer pricing study furnished
by the assessee, the TPO is required to undertake an
independent and fair analysis. Since the TPO substitutes the
transfer pricing study prepared by the assessee with his own
analysis, the TPO also assumes the corresponding responsibility
of maintaining and relying upon the information and
documentation forming the basis of the transfer pricing analysis
undertaken by him.
8. We have heard the learned counsel for the respective
parties and perused the material placed on record.
C. THE LEGISLATIVE SCHEME
9. Before proceeding to examine the questions arising in the
individual appeals, this Court finds it necessary to examine the
scope and ambit of the provisions contained in Chapter X of the
Income-tax Act, 1961, namely, Sections 92, 92A to 92CA, 92D,
92E, and 92F of the Act, together with Rules 10A to 10E of the
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Income-tax Rules, 1962. For the sake of convenience, the
relevant provisions are extracted below:
“[Computation of income from international
transaction having regard to arm's length price.
92. (1) Any income arising from an international
transaction shall be computed having regard to the arm's
length price.
Explanation.—For the removal of doubts, it is hereby
clarified that the allowance for any expense or interest
arising from an international transaction shall also be
determined having regard to the arm's length price.
(2) Where in an international transaction [or
specified domestic transaction], two or more associated
enterprises enter into a mutual agreement or
arrangement for the allocation or apportionment of, or
any contribution to, any cost or expense incurred or to
be incurred in connection with a benefit, service or
facility provided or to be provided to any one or more of
such enterprises, the cost or expense allocated or
apportioned to, or, as the case may be, contributed by,
any such enterprise shall be determined having regard to
the arm's length price of such benefit, service or facility,
as the case may be.
The following sub-section (2A) shall be inserted
after sub-section (2) of section 92 by the Finance
Act, 2012, w.e.f. 1-4-2013 :
(2A) Any allowance for an expenditure or interest or
allocation of any cost or expense or any income in
relation to the specified domestic transaction shall be
computed having regard to the arm's length price.
(3) The provisions of this section shall not apply in a
case where the computation of income under sub-section
(1) [or sub-section (2A)] or the determination of the
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allowance for any expense or interest under [that sub-
section], or the determination of any cost or expense
allocated or apportioned, or, as the case may be,
contributed under sub-section (2) [or sub-section (2A)],
has the effect of reducing the income chargeable to tax
or increasing the loss, as the case may be, computed on
the basis of entries made in the books of account in
respect of the previous year in which the international
transaction [or specified domestic transaction] was
entered into.]
Computation of arm's length price.
92C. (1) The arm's length price in relation to an
international transaction [or specified domestic
transaction] shall be determined by any of the following
methods, being the most appropriate method, having
regard to the nature of transaction or class of transaction
or class of associated persons or functions performed by
such persons or such other relevant factors as the Board
may prescribe, namely :—
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed by
the Board.
(2) The most appropriate method referred to in sub-
section (1) shall be applied, for determination of arm's
length price, in the manner as may be prescribed :
[Provided that where more than one price is
determined by the most appropriate method, the arm's
length price shall be taken to be the arithmetical mean of
such prices:
Provided further that if the variation between
the arm's length price so determined and price at which
the international transaction [or specified domestic
transaction] has actually been undertaken [does not
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exceed [such percentage of the latter, as may be
notified] by the Central Government in the Official
Gazette in this behalf], the price at which the
international transaction [or specified domestic
transaction] has actually been undertaken shall be
deemed to be the arm's length price.]
[Explanation.—For the removal of doubts, it is
hereby clarified that the provisions of the second proviso
shall also be applicable to all assessment or
reassessment proceedings pending before an Assessing
Officer as on the 1st day of October, 2009.]
[(2A) Where the first proviso to sub-section (2) as
it stood before its amendment by the Finance (No. 2)
Act, 2009 (33 of 2009), is applicable in respect of an
international transaction for an assessment year and the
variation between the arithmetical mean referred to in
the said proviso and the price at which such transaction
has actually been undertaken exceeds five per cent of
the arithmetical mean, then, the assessee shall not be
entitled to exercise the option as referred to in the said
proviso.]
[(2B) Nothing contained in sub-section (2A) shall
empower the Assessing Officer either to assess or
reassess under section 147 or pass an order enhancing
the assessment or reducing a refund already made or
otherwise increasing the liability of the assessee
under section 154 for any assessment year the
proceedings of which have been completed before the
1st day of October, 2009.]
(3) Where during the course of any proceeding for
the assessment of income, the Assessing Officer is, on
the basis of material or information or document in his
possession, of the opinion that—
(a) the price charged or paid in an international
transaction [or specified domestic transaction]
has not been determined in accordance with
sub-sections (1) and (2); or
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(b) any information and document relating to
an international transaction [or specified
domestic transaction] have not been kept and
maintained by the assessee in accordance with
the provisions contained in sub-section (1)
of section 92D and the rules made in this
behalf; or
(c) the information or data used in
computation of the arm's length price is not
reliable or correct; or
(d) the assessee has failed to furnish, within
the specified time, any information or
document which he was required to furnish by
a notice issued under sub-section (3)
of section 92D,
the Assessing Officer may proceed to determine
the arm's length price in relation to the said international
transaction [or specified domestic transaction] in
accordance with sub-sections (1) and (2), on the basis of
such material or information or document available with
him:
Provided that an opportunity shall be given by
the Assessing Officer by serving a notice calling upon the
assessee to show cause, on a date and time to be
specified in the notice, why the arm's length price should
not be so determined on the basis of material or
information or document in the possession of the
Assessing Officer.
(4) Where an arm's length price is determined by
the Assessing Officer under sub-section (3), the
Assessing Officer may compute the total income of the
assessee having regard to the arm's length price so
determined :
Provided that no deduction under section 10A
[or section 10AA] or section 10B or under Chapter VI-A
shall be allowed in respect of the amount of income by
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which the total income of the assessee is enhanced after
computation of income under this sub-section :
Provided further that where the total income of
an associated enterprise is computed under this sub-
section on determination of the arm's length price paid to
another associated enterprise from which tax has been
deducted [or was deductible] under the provisions of
Chapter XVIIB, the income of the other associated
enterprise shall not be recomputed by reason of such
determination of arm's length price in the case of the
first mentioned enterprise.
[Reference to Transfer Pricing Officer.
92CA. (1) Where any person, being the assessee,
has entered into an international transaction [or
specified domestic transaction] in any previous year, and
the Assessing Officer considers it necessary or expedient
so to do, he may, with the previous approval of the
Commissioner, refer the computation of the arm's length
price in relation to the said international transaction [or
specified domestic transaction] under section 92C to the
Transfer Pricing Officer.
(2) Where a reference is made under sub-section
(1), the Transfer Pricing Officer shall serve a notice on
the assessee requiring him to produce or cause to be
produced on a date to be specified therein, any evidence
on which the assessee may rely in support of the
computation made by him of the arm's length price in
relation to the international transaction [or specified
domestic transaction] referred to in sub-section (1).
[(2A) Where any other international transaction
[other than an international transaction referred under
sub-section (1)], comes to the notice of the Transfer
Pricing Officer during the course of the proceedings
before him, the provisions of this Chapter shall apply as
if such other international transaction is an international
transaction referred to him under sub-section (1).]
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[(2B) Where in respect of an international
transaction, the assessee has not furnished the report
under section 92E and such transaction comes to the
notice of the Transfer Pricing Officer during the course of
the proceeding before him, the provisions of this Chapter
shall apply as if such transaction is an international
transaction referred to him under sub-section (1).]
[(2C) Nothing contained in sub-section (2B) shall
empower the Assessing Officer either to assess or
reassess under section 147 or pass an order enhancing
the assessment or reducing a refund already made or
otherwise increasing the liability of the assessee
under section 154, for any assessment year, proceedings
for which have been completed before the 1st day of
July, 2012.]
(3) On the date specified in the notice under sub-
section (2), or as soon thereafter as may be, after
hearing such evidence as the assessee may produce,
including any information or documents referred to in
sub-section (3) of section 92D and after considering such
evidence as the Transfer Pricing Officer may require on
any specified points and after taking into account all
relevant materials which he has gathered, the Transfer
Pricing Officer shall, by order in writing, determine the
arm's length price in relation to the international
transaction [or specified domestic transaction] in
accordance with sub-section (3) of section 92C and send
a copy of his order to the Assessing Officer and to the
assessee.
[(3A) Where a reference was made under sub-
section (1) before the 1st day of June, 2007 but the
order under sub-section (3) has not been made by the
Transfer Pricing Officer before the said date, or a
reference under sub-section (1) is made on or after the
1st day of June, 2007, an order under sub-section (3)
may be made at any time before sixty days prior to the
date on which the period of limitation referred to
in section 153, or as the case may be, in section
153B for making the order of assessment or
reassessment or recomputation or fresh assessment, as
the case may be, expires.]
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[(4) On receipt of the order under sub-section (3),
the Assessing Officer shall proceed to compute the total
income of the assessee under sub-section (4) of section
92C in conformity with the arm's length price as so
determined by the Transfer Pricing Officer.]
(5) With a view to rectifying any mistake apparent
from the record, the Transfer Pricing Officer may amend
any order passed by him under sub-section (3), and the
provisions of section 154 shall, so far as may be, apply
accordingly.
(6) Where any amendment is made by the
Transfer Pricing Officer under sub-section (5), he shall
send a copy of his order to the Assessing Officer who
shall thereafter proceed to amend the order of
assessment in conformity with such order of the Transfer
Pricing Officer.
(7) The Transfer Pricing Officer may, for the
purposes of determining the arm's length price under
this section, exercise all or any of the powers specified in
clauses (a) to (d) of sub-section (1) of section 131 or
sub-section (6) of section 133 [or section 133A].
Explanation.—For the purposes of this section,
"Transfer Pricing Officer" means a Joint Commissioner or
Deputy Commissioner or Assistant Commissioner
authorised by the Board to perform all or any of the
functions of an Assessing Officer specified in sections
92C and 92D in respect of any person or class of
persons.]
Maintenance and keeping of information and
document by persons entering into an international
transaction [or specified domestic transaction].
92D. (1) Every person who has entered into an
international transaction [or specified domestic
transaction] shall keep and maintain such information
and document in respect thereof, as may be prescribed.
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(2) Without prejudice to the provisions contained
in sub-section (1), the Board may prescribe the period
for which the information and document shall be kept
and maintained under that sub-section.
(3) The Assessing Officer or the Commissioner
(Appeals) may, in the course of any proceeding under
this Act, require any person who has entered into an
international transaction [or specified domestic
transaction] to furnish any information or document in
respect thereof, as may be prescribed under sub-section
(1), within a period of thirty days from the date of
receipt of a notice issued in this regard :
Provided that the Assessing Officer or the
Commissioner (Appeals) may, on an application made by
such person, extend the period of thirty days by a further
period not exceeding thirty days.
Report from an accountant to be furnished by
persons entering into international transaction [or
specified domestic transaction].
92E. Every person who has entered into an
international transaction [or specified domestic
transaction] during a previous year shall obtain a report
from an accountant and furnish such report on or before
the specified date in the prescribed form duly signed and
verified in the prescribed manner by such accountant and
setting forth such particulars as may be prescribed..”
Rule 10B:
“Determination of arm's length price under
section 92C.
10B. (1) For the purposes of sub-section (2) of section
92C, the arm's length price in relation to an
international transaction [or a specified domestic
transaction] shall be determined by any of the following
methods, being the most appropriate method, in the
following manner, namely :—
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(a) comparable uncontrolled price method, by
which,—
(i) the price charged or paid for property
transferred or services provided in a
comparable uncontrolled transaction, or a
number of such transactions, is identified;
(ii)such price is adjusted to account for
differences, if any, between the
international transaction [or the specified
domestic transaction] and the comparable
uncontrolled transactions or between the
enterprises entering into such
transactions, which could materially affect
the price in the open market;
(iii)the adjusted price arrived at under sub-
clause (ii) is taken to be an arm's length
price in respect of the property transferred
or services provided in the international
transaction [or the specified domestic
transaction] ;
(b) resale price method, by which,—
(i) the price at which property purchased or
services obtained by the enterprise from
an associated enterprise is resold or are
provided to an unrelated enterprise, is
identified;
(ii)such resale price is reduced by the
amount of a normal gross profit margin
accruing to the enterprise or to an
unrelated enterprise from the purchase
and resale of the same or similar property
or from obtaining and providing the same
or similar services, in a comparable
uncontrolled transaction, or a number of
such transactions;
(iii)the price so arrived at is further reduced
by the expenses incurred by the enterprise
in connection with the purchase of
property or obtaining of services;
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(iv)the price so arrived at is adjusted to take
into account the functional and other
differences, including differences in
accounting practices, if any, between the
international transaction [or the specified
domestic transaction] and the comparable
uncontrolled transactions, or between the
enterprises entering into such
transactions, which could materially affect
the amount of gross profit margin in the
open market;
(v)the adjusted price arrived at under sub-
clause (iv) is taken to be an arm's length
price in respect of the purchase of the
property or obtaining of the services by
the enterprise from the associated
enterprise;
(c) cost plus method, by which,—
(i) the direct and indirect costs of production
incurred by the enterprise in respect of
property transferred or services provided
to an associated enterprise, are
determined;
(ii)the amount of a normal gross profit mark-
up to such costs (computed according to
the same accounting norms) arising from
the transfer or provision of the same or
similar property or services by the
enterprise, or by an unrelated enterprise,
in a comparable uncontrolled transaction,
or a number of such transactions, is
determined;
(iii)the normal gross profit mark-up referred
to in sub-clause (ii) is adjusted to take
into account the functional and other
differences, if any, between the
international transaction [or the specified
domestic transaction] and the comparable
uncontrolled transactions, or between the
enterprises entering into such
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transactions, which could materially affect
such profit mark-up in the open market;
(iv)the costs referred to in sub-clause (i) are
increased by the adjusted profit mark-up
arrived at under sub-clause (iii);
(v)the sum so arrived at is taken to be an
arm's length price in relation to the supply
of the property or provision of services by
the enterprise;
(d) profit split method, which may be applicable
mainly in international transactions [or
specified domestic transactions] involving
transfer of unique intangibles or in multiple
international transactions [or specified
domestic transactions] which are so
interrelated that they cannot be evaluated
separately for the purpose of determining the
arm's length price of any one transaction, by
which—
(i) the combined net profit of the associated
enterprises arising from the international
transaction [or the specified domestic
transaction] in which they are engaged, is
determined;
(ii)the relative contribution made by each of
the associated enterprises to the earning
of such combined net profit, is then
evaluated on the basis of the functions
performed, assets employed or to be
employed and risks assumed by each
enterprise and on the basis of reliable
external market data which indicates how
such contribution would be evaluated by
unrelated enterprises performing
comparable functions in similar
circumstances;
(iii)the combined net profit is then split
amongst the enterprises in proportion to
their relative contributions, as evaluated
under sub-clause (ii);
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(iv)the profit thus apportioned to the
assessee is taken into account to arrive at
an arm's length price in relation to the
international transaction [or the specified
domestic transaction] :
Provided that the combined net profit referred to in
sub-clause (i) may, in the first instance, be partially
allocated to each enterprise so as to provide it with a
basic return appropriate for the type of international
transaction [or specified domestic transaction] in
which it is engaged, with reference to market returns
achieved for similar types of transactions by
independent enterprises, and thereafter, the residual
net profit remaining after such allocation may be split
amongst the enterprises in proportion to their
relative contribution in the manner specified under
sub-clauses (ii) and (iii), and in such a case the
aggregate of the net profit allocated to the enterprise
in the first instance together with the residual net
profit apportioned to that enterprise on the basis of
its relative contribution shall be taken to be the net
profit arising to that enterprise from the international
transaction [or the specified domestic
transaction] ;
(e) transactional net margin method, by which,—
(i) the net profit margin realised by the
enterprise from an international
transaction [or a specified domestic
transaction] entered into with an
associated enterprise is computed in
relation to costs incurred or sales effected
or assets employed or to be employed by
the enterprise or having regard to any
other relevant base;
(ii)the net profit margin realised by the
enterprise or by an unrelated enterprise
from a comparable uncontrolled
transaction or a number of such
transactions is computed having regard to
the same base;
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(iii)the net profit margin referred to in sub-
clause (ii) arising in comparable
uncontrolled transactions is adjusted to
take into account the differences, if any,
between the international transaction [or
the specified domestic transaction] and
the comparable uncontrolled transactions,
or between the enterprises entering into
such transactions, which could materially
affect the amount of net profit margin in
the open market;
(iv)the net profit margin realised by the
enterprise and referred to in sub-clause (i)
is established to be the same as the net
profit margin referred to in sub-clause
(iii);
(v)the net profit margin thus established is
then taken into account to arrive at an
arm's length price in relation to the
international transaction [or the specified
domestic transaction];
[(f) any other method as provided in rule 10AB.]
(2) For the purposes of sub-rule (1), the comparability
of an international transaction [or a specified domestic
transaction] with an uncontrolled transaction shall be
judged with reference to the following, namely:—
(a) the specific characteristics of the
property transferred or services provided
in either transaction;
(b) the functions performed, taking into
account assets employed or to be
employed and the risks assumed, by the
respective parties to the transactions;
(c) the contractual terms (whether or
not such terms are formal or in writing) of
the transactions which lay down explicitly
or implicitly how the responsibilities, risks
and benefits are to be divided between the
respective parties to the transactions;
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(d) conditions prevailing in the markets
in which the respective parties to the
transactions operate, including the
geographical location and size of the
markets, the laws and Government orders
in force, costs of labour and capital in the
markets, overall economic development
and level of competition and whether the
markets are wholesale or retail.
(3) An uncontrolled transaction shall be comparable to
an international transaction [or a specified domestic
transaction] if—
(i) none of the differences, if any, between
the transactions being compared, or
between the enterprises entering into such
transactions are likely to materially affect
the price or cost charged or paid in, or the
profit arising from, such transactions in
the open market; or
(ii)reasonably accurate adjustments can be
made to eliminate the material effects of
such differences.
(4) The data to be used in analysing the comparability
of an uncontrolled transaction with an international
transaction [or a specified domestic transaction] shall be
the data relating to the financial year [(hereafter in this
rule and in rule 10CA referred to as the 'current year')]
in which the international transaction [or the specified
domestic transaction] has been entered into:
Provided that data relating to a period not being more
than two years prior to [the current year] may also be
considered if such data reveals facts which could have
an influence on the determination of transfer prices in
relation to the transactions being compared:
[Provided further that the first proviso shall not apply
while analysing the comparability of an uncontrolled
transaction with an international transaction or a
specified domestic transaction, entered into on or after
the 1st day of April, 2014.]
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[(5) In a case where the most appropriate method for
determination of the arm's length price of an
international transaction or a specified domestic
transaction, entered into on or after the 1st day of April,
2014, is the method specified in clause (b), clause (c) or
clause (e) of sub-section (1) of section 92C, then,
notwithstanding anything contained in sub-rule (4), the
data to be used for analysing the comparability of an
uncontrolled transaction with an international
transaction or a specified domestic transaction shall
be,—
(i) the data relating to the current year ; or
(ii)the data relating to the financial year
immediately preceding the current year, if
the data relating to the current year is not
available at the time of furnishing the
return of income by the assessee, for the
assessment year relevant to the current
year:
Provided that where the data relating to the current
year is subsequently available at the time of
determination of arm's length price of an international
transaction or a specified domestic transaction during
the course of any assessment proceeding for the
assessment year relevant to the current year, then,
such data shall be used for such determination
irrespective of the fact that the data was not available
at the time of furnishing the return of income of the
relevant assessment year.”
9.1 Section 92 provides for the determination of income
arising from an international transaction having regard to the
Arm's Length Price. It applies to transactions involving two or
more associated enterprises which have entered into a mutual
agreement or arrangement for the allocation or apportionment
of, or any contribution to, any cost or expense incurred or to be
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incurred in connection with a benefit, service, or facility
provided or to be provided to any one or more of such
enterprises. The cost or expense so allocated, apportioned, or
contributed is required to be determined having regard to the
Arm's Length Price of such benefit, service, or facility.
9.2 Section 92A defines the expression "associated
enterprise" for the purposes of Sections 92 to 92F. Section 92B
defines the expression "international transaction" for the
purposes of the aforesaid provisions. Section 92BA defines
"specified domestic transaction."
9.3 Section 92C provides the statutory mechanism for
determination of the Arm's Length Price by applying the most
appropriate method. The process commences with the selection
of the most appropriate method, followed by identification of
comparable uncontrolled transactions and determination of the
Arm's Length Price. The statute prescribes six recognised
methods for determining the Arm's Length Price, and the
selection of the most appropriate method depends upon the
facts and circumstances of each case. Where more than one
price is determined by applying the most appropriate method,
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the arithmetical mean of such prices is required to be adopted
as the Arm's Length Price in accordance with the statutory
framework and compared with the actual transaction price. If
the variation between the Arm's Length Price so determined
and the actual transaction price exceeds the permissible
tolerance range prescribed under the Act, the necessary
adjustment is required to be made.
9.4 Where the TPO finds that the Arm's Length Price
determined by the taxpayer is not in accordance with law,
Section 92C(3) empowers the TPO to determine the Arm's
Length Price afresh. Such determination is to be made by the
TPO in exercise of the powers conferred under Section 92CA(3).
However, before disputing the Arm's Length Price determined
by the taxpayer, the Assessing Officer or the TPO must satisfy
one or more of the conditions stipulated in clauses (a) to (d) of
sub-section (3) of Section 92C.
9.5 The aforesaid statutory mandate has been explained by
the High Court of Delhi in American Express Banking
Corporation (India Branch) vs. Assistant Director of
Income-tax, International Taxation, [2025] 174
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taxmann.com 595 (Delhi)/[2025] 476 ITR 752 (Delhi),
wherein it has been held that unless the conditions specified
under Section 92C(3) are satisfied, the TPO cannot proceed to
make any adjustment. The same principle was reiterated by the
High Court of Delhi in Li and Fung India (P.) Ltd. vs.
Commissioner of Income-tax, [2014] 223 Taxman 368
(Delhi)/[2014] 361 ITR 85 (Delhi), wherein Section 92C
was analysed in the following terms:
“26. Chapter X opens with Section 92 which provides
that the income arising from "international
transactions" shall be calculated having regard to the
ALP. The explanation to Section 92 clarifies that
allowance for any expense or interest arising from an
international transaction shall also be determined
having regard to the ALP. Section 92A defines as to
which the enterprises would, for the purposes of the
provisions of Chapter X, come within the purview of an
AE. Section 92A (1) generally defines an AE as one,
which is, directly or indirectly, managed and controlled
by another. The one appropriate mode, amongst the
several, through which control can be exercised by one
enterprise on the other is provided in sub-section (2) of
Section 92A. In the eventuality of an enterprise
fulfilling any of the attributes provided in sub-clause
(a) to clause (m), the two enterprises under Section
92A(2) is deemed to be AE. Section 92B defines as to
what would be construed as an "international
transaction". In order to appreciate the full width,
amplitude of an "international transaction" the meaning
of which is provided in section 92B one would have to
in addition read the definition of "transaction" given in
Section 92F(v).
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27. Section 92C is the provision enabling determination
of ALP. Section 92C (1) states that ALP in relation to
an "international transaction could be determined by
any of the methods provided in the said sub-section
which is "most appropriate" having regard to the
nature of transactions or class of transaction or class of
associated persons or functions performed by such
persons or such other relevant factors which may be
prescribed by the Board. The methods provided being
(a) comparable uncontrolled price method; (b) resale
price method; (c) cost plus method; (d) profit split
method; (e) transactional net margin method and; (f)
such other method as may be prescribed by the Board.
In determining the most appropriate method, regard is
to be had to Rules 10A and 10B of the IT Rules, 1962.
Section92C(3) casts the obligation of computing the
ALP on the assessee, at the first instance. The AO then
would proceed to determine the ALP in relation to
an "international transaction" in accordance with
Section 92C (1) and (2) only if he is of the opinion that
any of the circumstances as indicated in Section 92Cs
(3)(a) to sub-clause (d) of sub-Section (3) of Section
92C prevails. These circumstances are that the price
charged or paid for international transaction has not
been determined as prescribed under sub- section (1)
and (2) of section 92C or, the assessee has not kept
information and documents of its international
transactions in the form prescribed under Section 92D
(1) and the Rules made in that regard or, the
information or data used by the assessee in computing
the ALP is not reliable or correct or, that the assessee,
failed to furnish, within the specified time the
information sought pursuant to a notice issued under
Section 92D (3). The first proviso to Section 92 (3)
mandates that before the AO proceeds to determine
the ALP on the basis of the material or information or
document available with him he shall give an
opportunity by serving upon the assessee a show-
cause notice fixing thereby a date and time for the said
purpose. Under Section 92C (4) the Assessing Officer is
empowered to compute the total income of the
assessee only after the ALP has been determined by
the Assessing Officer in terms of the provision of sub-
section (3) of Section 92C.
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28. Under Section 92CA (inserted w.e.f 1.6.2002), the
AO is empowered to refer the computation of ALP, in
relation to, an "international transaction" under Section
92C to the TPO, if he considers
it "necessary" or "expedient" to do so with the prior
approval of the Commissioner. It is only after a
reference is made under Section 92CA(1) that the TPO
gets a mandate to approach upon the assessee by
issuing him a notice calling upon him to produce or
cause to be produced on a date to be specified therein,
any evidence on which the assessee may rely in
support of the computation made by him of the ALP.
Section 92CA(3) provides that the TPO, by an order in
writing, will determine the ALP in relation to
an "international transaction" in accordance with
Section 92C (3) after hearing such evidence as the
assessee may produce including any information or
documents referred to in Section 92D(3), after
considering such evidence as the TPO may require on
any specified points, and after taking into account all
relevant material which the TPO has gathered. The TPO
has to send a copy of the order, by which a
determination of ALP is made both to the Assessing
Officer and the assessee. Section 92CA(3A) provides
the time frame within which the TPO has to pass an
order under Section 92CA (3).”
9.6 It is also relevant to refer to the judgment of the High
Court of Delhi in Maruti Suzuki India Ltd. v. Additional
Commissioner of Income-tax, Transfer Pricing Officer,
[2010] 192 Taxman 317 (Delhi) / [2010] 328 ITR 210
(Delhi), wherein it was held as under:
“41. Under the new provision, the primary onus is on
the taxpayer to determine an arm's length price in
accordance with the rules and to substantiate the same
with prescribed documentation. Where such onus is
discharged by the assessee and the data used for
determining the arm's length price is reliable and
correct, there should normally be no intervention by
the Assessing Officer. Ordinarily, it is only where the
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assessee has not discharged the onus placed on him or
he has not determined the price of the international
transaction in question in terms of sub-sections (1) and
(2) of section 92 of the Act or the data used by him is
not reliable, correct or appropriate or the TPO finds
evidence which discredits the data used by the
assessee or the methodology applied by him in arriving
at arm's length price of the international transaction in
question, that the arm's length price declared by the
assessee should be rejected and re-determined in
terms of section 92C of the Act.”
9.7 Section 92CA empowers the Assessing Officer, with the
previous approval of the Commissioner, to make a reference to
the Transfer Pricing Officer (TPO) for determination of the
Arm's Length Price.
9.8 Section 92CB provides for the Safe Harbour Rules to be
notified by the Board. Section 92D mandates that every person
entering into an international transaction shall keep and
maintain such information and documents as may be
prescribed in relation to such transactions. The said provision
further imposes an obligation upon every such person to
furnish the prescribed information and documents to the
Assessing Officer whenever required.
9.9 Section 92D imposes a mandate upon the taxpayer to
maintain such information and documents as may be
prescribed.
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9.10 Section 92E requires every person entering into an
international transaction to obtain a report from an accountant
and furnish the same, in the prescribed form and manner, on or
before the specified date, duly signed and verified, setting forth
the prescribed particulars. Correspondingly, Rule 10E
prescribes Form No. 3CEB for the said purpose. Section 92F
defines certain expressions used in Chapter X.
9.11 Rule 10A defines certain expressions used in the Rules.
9.12 Rule 10B prescribes the complete mechanism for
determination of the Arm's Length Price under Section 92C.
Sub-rule (1) prescribes the appropriate methods for
determination of the Arm's Length Price.
9.13 Sub-rule (2) sets out the factors relevant for
comparability analysis. It mandates that the comparability of an
international transaction with an uncontrolled transaction shall
be examined with reference to the specific characteristics of the
property transferred or services provided, the functions
performed, assets employed and risks assumed by the
respective parties, the contractual terms governing the
allocation of responsibilities, risks and benefits between the
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parties to the transaction, and the prevailing market conditions,
including geographical location, size of the markets, the laws,
government orders, cost of labour and capital in the respective
markets, overall economic conditions, and the level of
competition.
9.14 Sub-rule (3) provides that an uncontrolled transaction
shall be considered comparable where none of the differences,
if any, materially affects the price, cost, or profit arising from
such transaction. However, where material differences exist,
reasonable adjustments are required to be made to eliminate
the effect of such differences.
9.15 Sub-rule (4) mandates the use of data relating to the
financial year in which the international transaction has been
entered into. The exception permits the use of data relating to
a period not exceeding two years prior to the relevant financial
year, subject to the conditions stipulated therein. Such prior
years' data may be used only where it reveals facts which could
have an influence on the determination of the transfer price in
relation to the international transaction entered into after the
1st day of April, 2014.
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9.16 Sub-rule (5) governs the use of current year data. Where
the current year data is not available at the time of furnishing
the return of income, the proviso to sub-rule (5) permits the
use of such data if it becomes available subsequently during
the course of determination of the ALP in the assessment
proceedings. In such a case, the current year data shall be
used for determining the ALP notwithstanding that the same
was not available at the time of furnishing the return of income
for the relevant assessment year.
9.17 Rule 10C provides for the selection of the most
appropriate method for the purposes of Section 92C(1). The
factors relevant for such selection include the nature and class
of the international transaction, the class of the associated
enterprises, the results of the functional analysis, the
availability and reliability of comparable data, the degree of
comparability, the extent to which reliable and accurate
adjustments can be made to eliminate material differences, and
the nature, extent and reliability of the assumptions required to
be made in applying the selected method.
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9.18 Rule 10CA lays down the mechanism for computing the
Arm's Length Price where application of the most appropriate
method results in more than one comparable price and also
contains illustrations for its application.
9.19 Rule 10CB provides for computation of interest income
pursuant to secondary adjustments for the purposes of Section
92CE. Rule 10D, in conformity with Section 92D, prescribes the
information and documentation to be maintained by every
person in relation to an international transaction and
comprehensively sets out the documentation requirements
applicable to every taxpayer.
9.20 Likewise, Rule 10DA, in conformity with Section 92D,
requires the maintenance and furnishing of information and
documents by certain persons constituting an international
group and exhaustively prescribes the information required to
be maintained. Rule 10E, in conformity with Section 92E,
prescribes Form No. 3CEB and the particulars and verification
required therein.
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D. ANALYSIS:
10. In the appeals before us, there is no dispute with regard
to the selection of the most appropriate method. Broadly, the
disputes relate to:
I. The correctness of the selection of comparables;
II. Turnover Filter;
III. Related Party Transactions (RPT);
IV. Foreign Exchange Gain or Loss;
V. Burden of proof;
VI. Inclusion or Exclusion of Comparables at the
Appellate Stage;
VII. Plus or Minus 5% Variation;
VIII. Working capital adjustment; and
IX. Correctness of Tribunal following earlier decisions.
I. Selection Of Comparables:
11. The correctness of the inclusion or exclusion of
comparables by the taxpayer, the TPO, and the Tribunal is in
question.
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11.1 Insofar as the transfer pricing study undertaken by the
taxpayer is concerned, the same is required to be in compliance
with Section 92C of the Act and Rule 10B of the Rules by
applying appropriate filters so as to eliminate the material
effect of differences. As held by the High Court of Delhi in the
judgments referred to supra, the transfer pricing study
undertaken by the taxpayer can be disturbed only if any of the
circumstances contemplated under clauses (a) to (d) of sub-
section (3) of Section 92C are attracted. In other words, the
conditions specified in Section 92C(3) must exist before the ALP
determined by the taxpayer can be rejected.
11.2 If the reasons assigned by the TPO for rejecting the
comparables selected by the taxpayer are examined, it is
evident that such rejection is not founded upon any of the
grounds enumerated in clauses (a) to (d) of sub-section (3) of
Section 92C. It is contended by the learned counsel appearing
for the assessees that the comparables selected by the
taxpayers have been rejected only for the purpose of
substituting them with a standard set of comparables uniformly
adopted by the TPO across the Department. On an examination
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of the appeals before us, such contention is not amenable to
outright rejection.
11.3 We find that the TPO has adopted a standard set of
comparables in respect of different segments, namely, software
development services and Information Technology Enabled
Services (ITES). The reasons assigned for rejecting the
comparables selected by the taxpayer and substituting them
with the comparables selected by the TPO do not satisfy the
requirements or fall within the parameters of clauses (a) to (d)
of sub-section (3) of Section 92C.
11.4 Further, the comparables selected by the TPO are also
required to satisfy the requirements of Rule 10B(2) of the
Rules. We find that the set of comparables adopted by the TPO
has been selected from a standard list of comparables applied
across different assessees and does not reflect the exercise
contemplated under Rule 10B(2). The said anomaly has been
corrected by the Tribunal in exercise of its jurisdiction as the
final fact-finding authority.
11.5 Moreover, the process of inclusion or exclusion of
comparables is essentially a data-driven factual exercise. Such
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findings ordinarily remain findings of fact unless the exercise is
shown to be perverse. Perversity, when properly pleaded and
established, may give rise to a substantial question of law.
However, in the present batch of appeals, we find that neither
has perversity been specifically pleaded nor has the same been
demonstrated insofar as the inclusion or exclusion of
comparables is concerned.
II. Turnover Filter:
12. The comparables included or selected by the TPO are
companies having higher turnover. The contention of the
Revenue that, since the relevant consideration is the profit
margin, the size of the comparable company is not a relevant
criterion, cannot be accepted. If such a principle were to be
applied on the premise that only the profit ratio is relevant,
there would be no justification for rejecting the application of a
lower turnover filter, which has been done by the TPO.
12.1 The size of the comparable company is one of the
relevant factors contemplated under Rule 10B(2). Undoubtedly,
companies having higher turnover enjoy advantages such as
established brand value, greater bargaining power, ownership
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of valuable Intellectual Property Rights (IPRs), and economies
of scale. These advantages are ordinarily unavailable to
companies having comparatively lower turnover. The size of a
company has a direct bearing on its pricing power,
competitiveness, vulnerability to market conditions, and other
commercial factors.
12.2 Although clause (d) of sub-rule (2) of Rule 10B refers to
market conditions, including the size of the markets, the factors
specified in clause (b), namely, the assets employed and the
risks assumed, also play a significant role in benchmarking
profits and determining comparability.
12.3 In the absence of any statutory prescription fixing either
a lower or an upper turnover limit, the adoption by the Tribunal
of an upper turnover filter of Rs.200 crores cannot be said to be
arbitrary. On the contrary, the said criterion is founded on a
rational and logical basis. Such a determination, being
essentially a finding of fact, cannot be interfered with unless
perversity is specifically pleaded and demonstrated.
12.4 Ultimately, the entire exercise of transfer pricing is
intended to determine the Arm's Length Price in controlled
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transactions between associated enterprises. Such an exercise
does not admit of any precise scientific formula. Since the
upper turnover filter of Rs.200 crores adopted by the Tribunal
is found to be rational and logical, this Court finds no reason to
interfere with the same.
III. Related Party Transaction (RPT) Filter :
13. The Related Party Transaction (RPT) Filter is applied while
selecting comparable companies for benchmarking the ALP so
as to eliminate, as far as possible, the influence of related party
transactions on the profitability of comparable companies. The
object of the filter is to ensure that uncontrolled transactions
are selected as comparables and that companies having
significant controlled transactions are excluded, except where
the availability of comparable companies is limited.
13.1 In the present batch of appeals, the TPO has applied an
RPT Filter of 25%, whereas the taxpayer as well as the Tribunal
have adopted an RPT Filter of 15%.
13.2 Undoubtedly, uncontrolled comparable transactions are to
be preferred in order to eliminate the influence of related party
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transactions on profitability. At the same time, insisting upon
comparables having absolutely no related party transactions
may not always be practicable. The RPT Filter, therefore,
operates as a permissible tolerance while selecting comparable
companies. Ideally, the percentage of the RPT Filter should be
the lowest possible among the available comparable
companies.
13.3 Where the taxpayer has selected comparable companies
by applying a 15% RPT Filter and there is no finding that such
comparables fail to satisfy the requirements of the Act or the
Rules, there is no rational basis for increasing the RPT
threshold to 25%. Where comparable companies with a lower
percentage of related party transactions are available, adoption
of a lower RPT Filter results in a narrower tolerance and
correspondingly reduces the influence of related party
transactions on the profitability of the comparable companies.
In such circumstances, adoption of a 25% RPT Filter would be
without any rational basis.
13.4 At the same time, an RPT Filter of 25% cannot be
rejected as impermissible in all cases. Where either the
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taxpayer or the TPO demonstrates that an adequate number of
comparable companies satisfying a lower RPT threshold are not
available, there can be no objection to adopting a higher RPT
Filter. The enhancement of the RPT threshold up to 20% or
25% must, however, be founded upon a specific finding
regarding the non-availability of sufficient comparable
companies satisfying a lower RPT threshold. In the absence of
such a finding, adoption of a 25% RPT Filter merely as a
standard upper tolerance limit is without any rational basis.
13.5 The exercise of determining the appropriate RPT Filter is
necessarily fact-based and depends upon the availability of
comparable companies in each case. Except for the contention
that interference with the application of a 25% RPT Filter by the
Tribunal is erroneous, the Revenue has neither pleaded nor
demonstrated any violation of the provisions of the Act or the
Rules, nor any perversity in the findings recorded by the
Tribunal. Consequently, the adoption of a 15% RPT Filter by the
Tribunal cannot be held to be arbitrary or without basis.
13.6 However, it is necessary to clarify that where comparable
companies satisfying a 15% RPT Filter are not available, there
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is no legal bar to adopting a higher RPT threshold, such as 20%
or 25%, provided the TPO records a specific finding regarding
the non-availability of sufficient comparable companies
satisfying the lower RPT threshold.
IV. Foreign Exchange Gain Or Loss:
14. It is the contention of the Revenue that foreign exchange
gain or loss is not dependent upon the operations carried out
by the company and, therefore, cannot be treated as part of
the operating revenue or operating cost. It is submitted that,
for the purpose of determination of the ALP, only the
international transactions entered into with the Associated
Enterprises (AE) are relevant. Accordingly, foreign exchange
gain or loss arising on account of the date of realization of
proceeds from the AE is liable to be excluded from the
operating revenue or operating cost.
14.1 The learned ASG, however, submitted that where the
foreign exchange gain or loss has a direct nexus with the
international transaction, such gain or loss may appropriately
be treated as part of the operating revenue or operating cost.
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14.2 On the other hand, it is the contention of the taxpayer
that where the foreign exchange gain or loss is linked to, or is
derived from, the business operations, it should be classified as
operating or non-operating depending upon its direct nexus
with the operating activity. It is submitted that gain or loss
arising on account of fluctuation in foreign exchange during the
execution of export or import contracts is merely incidental to
the business operations and, therefore, is required to be
treated as an operating item.
14.3 There can be no dispute that the international
transactions entered into by the taxpayer with its Associated
Enterprises constitute the basis for determination of the ALP
and that foreign exchange fluctuation is an external factor.
However, where the international transaction with the
Associated Enterprise is intrinsically linked with foreign
exchange fluctuation, the resultant gain or loss forms an
integral part of the international transaction and is liable to be
treated as operating revenue or operating cost, as the case
may be.
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14.4 Whether foreign exchange gain or loss constitutes an
operating item necessarily depends upon the nature of the
transaction and the factual matrix of each case. No uniform or
standardized rule can be laid down in that regard. Where the
assessee seeks to treat foreign exchange gain or loss as an
operating item, the burden lies upon the assessee to establish a
direct nexus between such gain or loss and the international
transaction and to demonstrate that the same is derived from
the international transaction. In contradistinction, where the
foreign exchange gain or loss has no nexus with the
international transaction and merely arises on account of
fluctuation in foreign exchange, it cannot be regarded as
forming part of the operating revenue or operating cost.
14.5 Where the consideration arising from an international
transaction is external to the value of the transaction itself, any
gain or loss arising on account of foreign exchange fluctuation
remains merely attributable to the business and cannot be said
to be derived from the international transaction.
V. Burden of Proof:
15. The provisions of Chapter X, particularly Rule 10B, Rule
10D and Section 92D of the Act, impose a mandate upon every
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person entering into an international transaction to keep and
maintain the prescribed information and documents. Section
92C places the initial burden upon the taxpayer to determine
the ALP. Section 92CA empowers the TPO to re-determine the
ALP where he does not agree with the determination made by
the taxpayer.
15.1 In the process of determination of the ALP, whether by
the taxpayer or by the TPO, one of the fundamental exercises is
the inclusion or exclusion of comparables. Where the assessee
seeks inclusion or exclusion of any comparable, the burden lies
upon the assessee to furnish the information and
documentation necessary to support such determination. Sub-
section (3) of Section 92CA authorises the TPO to determine
the ALP in relation to an international transaction by rejecting
the ALP determined by the taxpayer. Such re-determination
may involve either inclusion or exclusion of comparables. Once
the TPO undertakes such re-determination, the burden, to that
extent, shifts upon the TPO to justify the comparables selected
or rejected by him.
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15.2 There cannot be a universal rule regarding the burden of
proof either upon the taxpayer or upon the TPO. The burden
necessarily depends upon the party seeking inclusion or
exclusion of a comparable. Where inclusion of a comparable by
the TPO is challenged before the Tribunal, the burden
undoubtedly remains upon the TPO to justify such inclusion.
Conversely, where exclusion of a comparable is sought by the
taxpayer before the Tribunal, or where the taxpayer seeks
inclusion of a new comparable, the burden of maintaining and
producing the information and documentation contemplated
under Section 92D and Rule 10D continues to remain upon the
taxpayer. Thus, the question of burden of proof is essentially
fact-dependent and varies according to the nature of the
challenge raised in each case.
VI. Inclusion or Exclusion of Comparables at the
Appellate Stage:
16. The Revenue has vehemently contended that once the
ALP is determined by the TPO, either on the basis of the
transfer pricing study submitted by the taxpayer or on the basis
of an independent analysis undertaken by the TPO, no further
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inclusion or exclusion of comparables should be permitted at a
subsequent stage. The said contention cannot be accepted.
16.1 Selection of comparables constitutes the foundational
step in determining the ALP. Comparability is necessarily
required to be examined with reference to the transactions of
comparable companies relating to the relevant assessment
year. At the stage of filing the return of income, the taxpayer
prepares the transfer pricing study on the basis of the data
then available in respect of comparable companies.
Subsequently, during the assessment proceedings or appellate
proceedings, more comprehensive and reliable data may
become available, revealing better comparables than those
originally selected. Merely because the transfer pricing study
has already been furnished, the taxpayer cannot be precluded
from seeking inclusion or exclusion of comparables on the basis
of such subsequently available data.
16.2 The considerable time gap between the preparation of the
transfer pricing study by the taxpayer, the determination of the
ALP by the TPO, and the availability of improved financial data
cannot be ignored. Indeed, the TPO himself derives the benefit
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of more comprehensive and updated information while rejecting
or re-determining the ALP proposed by the taxpayer. If the
taxpayer is permitted to determine the ALP only on the basis of
the limited data available at the time of filing the return,
fairness requires that the taxpayer should equally be permitted
to rely upon subsequently available data where such data
facilitates selection of more appropriate comparables and
thereby advances the object of transfer pricing provisions.
16.3 For the very same reasons, where further reliable data
becomes available during the pendency of the appeals before
the Tribunal, there can be no absolute bar against inclusion or
exclusion of comparables, provided such subsequently
identified comparables are demonstrably better comparables
than those originally selected.
16.4 At the same time, such permission cannot be granted as
a matter of course. The newly proposed comparables must
satisfy the mandatory requirements prescribed under Section
92C of the Act and Rule 10B of the Rules. Whenever such a
plea is raised before the Tribunal, it is open to the Tribunal
either to undertake the exercise itself, where sufficient material
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is available on record, or to remand the matter to the TPO or
the Assessing Officer for fresh determination of the ALP after
considering the proposed inclusion or exclusion of comparables.
16.5 In this regard, the proviso to sub-rule (5) of Rule 10B
expressly permits the use of subsequently available current
year data at the stage of determination of the ALP,
notwithstanding that such data was not available at the time of
furnishing the return of income for the relevant assessment
year. Having regard to the object underlying the said proviso,
this Court finds no statutory prohibition against permitting
inclusion or exclusion of comparables at the appellate stage
before the Tribunal on the basis of subsequently available data.
16.6 It is, however, made clear that the use of subsequently
available data and the consequent inclusion or exclusion of
comparables must strictly satisfy the requirements of the Act
and the Rules governing the selection of comparables.
VII. Plus or Minus 5% Variation:
17. The Revenue contends that where the arithmetic mean is
determined in terms of the first proviso to Section 92C(2), and
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the variation between the ALP so determined and the price at
which the international transaction has actually been
undertaken does not exceed 5%, the price at which the
international transaction has been undertaken is deemed to be
the ALP. It is submitted that the Tribunal has erroneously
treated the 5% variation as a standard deduction and, after
deducting the said percentage, examined whether the
remaining variation exceeded 5%, which is contrary to the
scheme of Section 92C(2).
17.1 On the other hand, the assessee contends that the 5%
variation is liable to be excluded while determining the
adjustment. The Tribunal has accepted the said contention and
has treated the 5% variation as a standard deduction before
computing the difference.
17.2 On a plain reading of Section 92C, the aforesaid
interpretation does not commend acceptance. The first proviso
to Section 92C(2) provides that where more than one price is
determined by applying the most appropriate method, the ALP
shall be taken to be the arithmetic mean of such prices. The
ALP so determined is thereafter required to be compared with
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the price at which the international transaction has actually
been undertaken. If the variation between the two does not
exceed 5%, the price at which the international transaction has
been undertaken is deemed to be the ALP. It is only where the
variation exceeds the prescribed tolerance range that transfer
pricing adjustment becomes necessary.
17.3 The above legal position emerges upon the amendment
introduced by the Finance (No. 2) Act, 2009, with effect from
1-10-2009. Prior thereto, under the proviso substituted by the
Finance Act, 2002, with effect from 1-4-2002, where more than
one price was determined by applying the most appropriate
method, the ALP was to be taken as the arithmetic mean of
such prices or, at the option of the assessee, a price varying
from such arithmetic mean by an amount not exceeding 5% of
the arithmetic mean. Though the proviso substituted by the
Finance (No. 2) Act, 2009, was made effective from 01-10-
2009, the controversy regarding the applicability of the pre-
amended proviso continued.
17.4 The Finance Act, 2012 inserted sub-section (2A) to
Section 92C with retrospective effect from 1-4-2002, thereby
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disentitling the assessee from claiming the benefit of the option
available under the proviso as it existed prior to its substitution
by the Finance (No. 2) Act, 2009. The further issue as to
whether sub-section (2A) operates retrospectively has been
authoritatively answered by the High Court of Delhi in
Marubeni India (P.) Ltd. vs. Director of Income-tax,
[2013] 33 taxmann.com 100 (Delhi)/ [2013] 354 ITR
638 (Delhi), wherein it has been held that sub-section (2A)
operates retrospectively from Assessment Year 2002-03.
Consequently, the issue regarding the retrospective operation
of sub-section (2A) is no longer res integra.
17.5 Insofar as the contention that the 5% variation should be
treated as a standard deduction is concerned, Section 92C(2)
merely provides a tolerance range within which no transfer
pricing adjustment is required where the variation between the
arithmetic mean and the price of the international transaction
falls within the prescribed limit. On a plain and literal
interpretation, the provision does not contemplate the grant of
a standard deduction of 5% before determining whether the
variation falls within the permissible range.
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17.6 The object of prescribing a tolerance range of 5%, which
now stands reduced to 3% by the Finance Act, 2012, was not
to confer a deduction but to avoid transfer pricing adjustments
on account of marginal pricing differences. Acceptance of the
view adopted by the Tribunal would not only defeat the object
of the provision but would also amount to rewriting the
statutory scheme by extending the tolerance range beyond
what has been provided by the Legislature.
17.7 In view of the above, we hold that the tolerance range of
5% provided under the proviso to Section 92C(2), both prior to
and after the amendment introduced by the Finance (No. 2)
Act, 2009, is not in the nature of a standard deduction. We
further hold that sub-section (2A) of Section 92C operates
retrospectively with effect from 1-4-2002 and is accordingly
applicable from Assessment Year 2002-03.
17.8 We may also refer to the judgment of the High Court of
Delhi in Sony Ericsson Mobile Communications India (P.)
Ltd. v. Commissioner of Income-tax-III, [2015] 231
Taxman 113 (Delhi) / [2015] 374 ITR 118 (Delhi),
wherein the retrospective operation of sub-section (2A) of
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Section 92C has also been considered. The relevant
observations are extracted below:
“76. It must be stated that transfer pricing is not
an exact science but a method of legitimate
quantification which requires exercise of judgment on
the part of the tax administration and the taxpayer. It
is method and formula based and, therefore, is rational
and scientific. However, not being perfect or infallible,
first and the second proviso to sub-section (2) along
with stipulations in Sub-section (2A) and 2(B) of
section 92C posit a 'getaway' clause when the arm's
length price so determined and the controlled price
does not exceed 5%( reduced to 3% w.e.f. 1st April,
2012). In such cases the actual price paid or received
by the assessed from the foreign AE is not disturbed.
In other cases, the transaction price gets substituted
with the arm's length price so determined. Sub-section
2A to Section 92C was inserted by the Finance Act,
2012 with retrospective effect from 1st April, 2002. It
states that where the arm's length price determined
under sub-section (1) exceeds the arm's length price
as declared by 5%, the assessee would not be entitled
to exercise the option under first proviso to sub-section
(2) as it stood before its amendment by the Finance
(No.2) Act, 2009. The "gateway" of 5% or 3%, as the
case may be, can be applied if the variation in arm's
length price and transaction/controlled price does not
exceed the specified percentage. Sub-section (2A),
therefore, stipulates that where the difference exceeds
the prescribed percentage, the assessee would not be
entitled to exercise the option under the first proviso to
sub-section (2) to Section 92C and claim reduction.
Similarly, the first proviso to Section 92C stipulates
that where more than one price is determined by most
appropriate method, the arm's length price shall be
taken to be the arithmetical mean of such prices.”
17.9 The aforesaid observations also support our view that the
tolerance range of 5% is not in the nature of a standard
deduction.
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VIII. Working Capital Adjustment:
18. Working Capital Adjustment (WCA) is one of the
comparability adjustments undertaken while determining the
ALP to neutralize differences in financing costs arising from
variations in the levels of receivables, payables, and inventory
between the tested party and comparable uncontrolled
enterprises. Though Working Capital Adjustment is not a filter
for the selection of comparables, Rule 10B(3) contemplates
making reasonably accurate adjustments to eliminate material
differences affecting the price or profit margin.
18.1 The necessity for Working Capital Adjustment arises
having regard to the levels of current assets and current
liabilities. Trade receivables, trade payables, inventory, and
other relevant financial parameters constitute the principal
components for determining such adjustment. The object of the
adjustment is to eliminate material differences in working
capital that have a bearing on the operating profit margin or
other commercial terms governing the transactions of the
taxpayer or the tested party. Factors such as borrowing costs
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and the period of credit, whether in respect of receivables or
payables, may materially influence the price or profit margin.
18.2 There can be no fixed or scientific formula for granting
Working Capital Adjustment, as the exercise necessarily
depends upon the facts and circumstances of each case. The
determination of such adjustment is essentially data-driven,
and the manner as well as the extent of the adjustment are not
specifically prescribed either under the Act or the Rules.
Consequently, the grant or denial of Working Capital
Adjustment invariably involves an appreciation of facts.
18.3 Unless it is demonstrated that the determination suffers
from a violation of the provisions of the Act or the Rules, or
that the findings recorded by the Tribunal are perverse, the
conclusions reached by the Tribunal on Working Capital
Adjustment remain findings of fact and, by themselves, do not
give rise to any substantial question of law.
IX. Correctness of Tribunal following earlier decisions:
19. One of the principal grievances raised by the Revenue is
that the Tribunal has excluded or included comparables by
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placing reliance on its decisions rendered in other cases,
including cases relating to the same assessee. It is contended
that once the Tribunal interferes with the findings of the TPO
regarding the inclusion or exclusion of comparables, it is
required to undertake an independent exercise in accordance
with Section 92C of the Act and Rule 10B of the Rules.
19.1 The said contention cannot be accepted. Once the
Tribunal, in the case of any taxpayer, records findings
regarding the functions performed, assets employed, or risks
assumed and, on that basis, finds justification to include or
exclude a comparable, there can be no prohibition in following
such decision where it relates to the same assessment year or
to the preceding years, as permissible under Rule 10B,
provided the relevant facts and circumstances remain identical.
If the functional analysis and other relevant factors continue to
be the same, and the issue has already been adjudicated by
the Tribunal, no fault can be found with the Tribunal following
its earlier decision instead of undertaking a repetitive exercise.
Merely because the Tribunal has relied upon its earlier decision,
it cannot be said that its findings are not in conformity with
Section 92C of the Act and Rule 10B of the Rules.
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19.2 However, it is always open to the Revenue or the
assessee to demonstrate that the inclusion or exclusion of a
particular comparable in the earlier decision was incorrect or
that the facts of the present case are distinguishable so as to
warrant a different conclusion.
E. CONCLUSION
(i) The Court concludes that Chapter X of the Income-tax
Act, 1961 constitutes a self-contained code governing
transfer pricing, providing a complete statutory
framework for determination of the Arm's Length Price
(ALP), maintenance of documentation, and assessment
of international transactions.
(ii) The initial burden of determining the ALP and
maintaining the prescribed documentation rests upon
the taxpayer, while the Transfer Pricing Officer can
interfere with the taxpayer's determination only upon
satisfaction of the conditions stipulated under Section
92C(3) of the Act.
(iii) The selection or exclusion of comparables is essentially
a factual and data-driven exercise, and the TPO cannot
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reject the taxpayer's comparables merely to substitute
them with a standard departmental set. Such
determination must strictly conform to the
requirements of Rule 10B of the Rules.
(iv) The Tribunal's adoption of an upper turnover filter of
Rs.200 crores is rational and legally sustainable, as
turnover, brand value, economies of scale, bargaining
power and ownership of intangibles materially influence
comparability and profitability.
(v) An RPT filter of 15% is ordinarily preferable, though a
higher threshold of 20% or 25% may be adopted only
upon recording a specific finding that sufficient
comparable companies satisfying the lower threshold
are unavailable.
(vi) Foreign exchange gain or loss can be treated as an
operating item only when it has a direct nexus with the
international transaction. Where such nexus is absent,
it cannot form part of the operating revenue or
operating cost.
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(vii) The burden of proof varies according to the nature of
the dispute. While the taxpayer bears the initial burden
of substantiating the ALP, once the TPO rejects the
taxpayer's determination and substitutes comparables,
the burden shifts to the TPO to justify such inclusion or
exclusion.
(viii) There is no legal prohibition against inclusion or
exclusion of comparables at the appellate stage,
provided the subsequently relied upon data is reliable
and the proposed comparables satisfy the requirements
of the Act and the Rules.
(ix) The tolerance of ±5% prescribed under Section 92C of
the Act is merely a permissible variation and not a
standard deduction, and transfer pricing adjustment
becomes necessary whenever the variation exceeds the
prescribed statutory limit.
(x) Working Capital Adjustment is a comparability
adjustment and not a selection filter, and its grant
depends entirely upon the facts of each case. Findings
on such adjustment, like the selection of comparables,
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ordinarily remain findings of fact and do not warrant
interference unless shown to be contrary to the Act or
vitiated by perversity.
F. APPLICATION OF THE AFORESAID LEGAL
PRINCIPLES TO THE FACTS
20. Though other issues may arise in the appeals below, in
the remand proceedings, we are concerned only with the issues
to the extent directed by the Hon'ble Supreme Court in SAP
Labs India (P.) Ltd., (supra).
(1) ITA No.956/2017:
SQL No.1:
21. The issue relates to the direction issued by the Tribunal to
adopt a Related Party Transactions (RPT) filter of 15%. The
Tribunal has recorded a finding that the normal tolerance limit
for the RPT filter should not exceed 15%.
21.1 This Court has already discussed the issue in detail and
has held that an RPT filter of up to 25% may be adopted only
where sufficient comparable companies satisfying the
qualitative and quantitative parameters are not available, and
only upon recording a specific finding to that effect. In the
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absence of such a finding, the normal benchmark of 15% is
required to be applied.
21.2 In the present case, it is not the contention of the
Revenue that sufficient comparable companies satisfying the
15% RPT filter were unavailable. The issue of the RPT filter
largely falls within the realm of factual exercise, unless
perversity is established. In the absence of any such pleading
or material to substantiate the same, the direction issued by
the Tribunal to adopt an RPT filter of 15% does not warrant
interference.
21.3 Accordingly, we hold that no substantial question of law
arises for consideration on this issue.
SQL No.2:
21.4 Question No. 2 relates to the exclusion of certain
comparables on the ground of functional dissimilarity.
21.5 In the foregoing discussion, we have held that the
selection or exclusion of comparables is essentially a factual
exercise based on the material and data available on record.
The findings recorded by the Tribunal in this regard can be
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interfered with only if the inclusion or exclusion of comparables
is shown to be contrary to the provisions of Section 92C of the
Act and Rule 10B of the Rules. The scope of re-examination by
this Court, pursuant to the order of the Hon'ble Supreme Court,
is confined to that extent.
21.6 In the present case, there is neither any specific plea of
perversity nor any material placed on record to demonstrate
that the findings of the Tribunal excluding the comparables are
perverse or contrary to the statutory provisions. The findings
recorded by the Tribunal, therefore, remain pure findings of
fact and do not give rise to any substantial question of law
warranting interference by this Court.
(2) ITA No.128/2015:
SQL Nos.1 and 2:
22. The Revenue has questioned the exclusion of M/s. e-Zest
Solutions Limited as a comparable by placing reliance on the
decision of the Tribunal in 3DPLM Software Solutions
Limited vs. DCIT, IT (TP) A.No.1303/Bang/2012. In the
said decision, the Tribunal, after examining the functional
profile of the company, found it to be functionally dissimilar and
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directed its exclusion as a comparable. Both the assessment
year involved in the present case and the assessment year
considered in the said decision are 2008-09.
22.1 The correctness of the finding recorded by the Tribunal
has neither been pleaded nor demonstrated to be contrary to
any provision of the Act or the Rules. Likewise, no plea of
perversity has been raised or established in relation to the
exclusion of the said comparable. The Tribunal has followed its
earlier decision based on an analysis of the functional profile of
the company, and it is not shown that the factual matrix in the
present case is materially different so as to warrant a different
conclusion.
22.2 In the above circumstances, we are of the view that no
substantial question of law arises from the order of the Tribunal
on this issue.
SQL Nos.3 and 4:
22.3 In the discussion made hereinabove, we have held that
foreign exchange gain or loss cannot be treated as operating in
nature unless it is derived from the international transaction,
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with the underlying contracts having a direct nexus to such
international transaction.
22.4 Though the Revenue has contended that foreign
exchange gain or loss is merely attributable to the operating
activity and is not derived from the operating activity, and
therefore cannot be treated as an operating item, in the light of
the discussion made above, it is open to the Transfer Pricing
Officer to verify, on the facts of each case, whether the foreign
exchange gain or loss is derived from the international
transaction. Such determination shall necessarily depend upon
the existence of a direct nexus between the foreign exchange
gain or loss and the international transaction. To undertake the
above exercise, the issue stands remitted to the TPO.
22.5 Subject to the above observations, we do not find that
any substantial question of law arises for consideration on this
issue.
(3) ITA No.469/2015:
23. Substantial Question of Law No. 2 arises for
consideration. However, in view of our findings in ITA No.
128/2015 while answering Substantial Questions of Law Nos. 3
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and 4, the said question does not survive for independent
consideration, except to the extent of the observations made
therein. As held in ITA No.128/2015, this issue stands remitted
to the TPO to undertake the exercise as directed.
(4) ITA No.955/2017:
SQL No.1:
24. In the light of our answer to Question No. 1 in ITA No.
956/2017, no substantial question of law arises for
consideration by this Court.
SQL No.2:
24.1 In view of the findings recorded while answering
Substantial Question of Law No. 2 in ITA No. 956/2017, no
substantial question of law arises for consideration by this
Court.
(5) ITA No.44/2015:
25. The Substantial Questions of Law that arise for
consideration are Question Nos. 1 and 2.
25.1 The dispute raised by the Revenue relates to the
correctness of the exclusion of certain comparables. The
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Tribunal has directed such exclusion by placing reliance on its
earlier decision in 3DPLM Software Solutions Limited
(supra). While answering Substantial Question of Law Nos. 1
and 2 in ITA No. 128/2015, we have held that no fault can be
found with the exclusion of comparables where the earlier
decision records functional dissimilarity and such functional
dissimilarity continues to exist in the present case.
25.2 Having regard to the said findings, and further
considering that the findings recorded by the Tribunal are in
conformity with the provisions of Section 92C of the Act and
Rule 10B of the Rules, we find no reason to interfere. The
Revenue has neither pleaded nor demonstrated that the
findings of the Tribunal excluding the comparables suffer from
perversity. In the absence of any demonstrated perversity, the
findings recorded by the Tribunal remain findings of fact and do
not give rise to any substantial question of law.
25.3 Accordingly, we hold that Substantial Question of Law
Nos. 1 and 2 do not arise for consideration.
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(6) ITA Nos.23/2011 and 24/2011:
SQL Nos.(a) and (b):
26. The issue relates to the treatment of foreign exchange
gain or loss. The said issue has already been answered by this
Court in ITA No. 128/2015. The findings recorded while
answering Substantial Question of Law Nos. 3 and 4 in ITA No.
128/2015 shall equally govern the present case, subject to the
observations, findings, and the liberty reserved to the Transfer
Pricing Officer therein. To undertake the above exercise, the
issue stands remitted to the TPO.
26.1 Accordingly, we hold that no substantial question of law
arises for consideration on this issue.
SQL Nos.(d) and (e):
26.2 The above Substantial Questions of Law relate to the
exclusion of certain comparables on the ground of supernormal
profits. The principal dispute concerns the correctness of the
exclusion of such comparables. As directed by the Hon'ble
Supreme Court in SAP Labs India (P.) Ltd. (supra), this
Court is required to examine whether the selection or exclusion
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of comparables is in conformity with the provisions of Section
92C of the Act and Rule 10B of the Rules.
26.3 While directing the exclusion of certain comparables, the
Tribunal has placed reliance on its earlier decisions. Insofar as
the exclusion of Hinduja TMT Limited and Aftek Infosys Limited
is concerned, the exclusion was based on the benefit available
under the proviso to Section 92C(2). The said proviso
underwent amendment by the Finance (No. 2) Act, 2009, and
by virtue of sub-section (2A) of Section 92C, the benefit
available under the pre-amended proviso stood withdrawn with
retrospective effect from 1-4-2002. As held by us hereinabove,
sub-section (2A) of Section 92C operates retrospectively from
Assessment Year 2002-03.
26.4 In the light of the aforesaid finding, the correctness of the
exclusion of Hinduja TMT Limited and Aftek Infosys Limited as
comparables requires reconsideration by the Tribunal in
accordance with law.
26.5 Accordingly, Substantial Question of Law Nos. (d) and (e)
are left unanswered to the aforesaid extent. The order of the
Tribunal, insofar as it relates to the exclusion of the said
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comparables, is set aside, and the matter is remitted to the
Tribunal for fresh consideration in accordance with law.
Insofar as SQL (c) and (i):
26.6 The Tribunal has excluded Geometric Software Company
Limited from the list of comparables selected by the TPO on the
ground of functional dissimilarity as well as the absence of
segmental financial information. The findings recorded by the
Tribunal cannot be said to be contrary to the provisions of
Section 92C of the Act or Rule 10B of the Rules.
26.7 The Revenue has neither pleaded nor established that the
findings of the Tribunal suffer from perversity. In the absence
of any demonstrated perversity, no substantial question of law
arises from such findings of fact. The conclusions recorded by
the Tribunal, being pure findings of fact, do not warrant
interference by this Court.
26.8 Accordingly, we hold that no substantial question of law
arises for consideration on this issue.
SQL Nos.(f), (g) and (h):
26.9 In the preceding paragraphs, we have held that the
tolerance range of ±5% is not in the nature of a standard
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deduction. It merely prescribes the permissible range within
which no further transfer pricing adjustment is required. The
approach adopted by the Tribunal in granting a 5% standard
deduction before examining whether the variation falls within
the tolerance range is, therefore, held to be legally
unsustainable.
26.10 We have also held that sub-section (2A) of Section 92C,
inserted by the Finance Act, 2012 with retrospective effect from
1-4-2002, is applicable retrospectively from Assessment Year
2002-03 onwards. Since the assessment year involved in the
present case is 2003-04, the said amendment squarely applies.
26.11 Accordingly, the findings recorded by the Tribunal on
this issue are set aside, and the matter is remitted to the TPO
for fresh determination in the light of the observations made
hereinabove.
26.12 All the three Substantial Questions of Law are,
accordingly, answered in favour of the Revenue and against the
assessee.
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(7) ITA No.492/2016:
27. During the course of hearing, it was submitted that only
substantial question of law Nos. 1 and 2 arise for consideration
in the present appeal.
SQL No.1:
27.1 The issue relating to the treatment of foreign exchange
gain or loss has already been considered by this Court while
answering Substantial Question of Law Nos. 3 and 4 in ITA No.
128/2015. Subject to the findings recorded therein, and the
directions issued and liberty reserved to the Transfer Pricing
Officer, we hold that no substantial question of law arises for
consideration by this Court on this issue. To undertake the
above exercise, the issue stands remitted to the TPO.
SQL No.2:
27.2 The Tribunal has directed the exclusion of M/s. Bodhtree
Consulting Limited and Infosys Limited from the list of
comparables on the ground of functional dissimilarity. The
Tribunal has recorded a finding that the said companies
exhibited drastic variations in their profit margins, warranting
their exclusion from the list of comparables.
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27.3 The findings recorded by the Tribunal are in conformity
with the provisions of Section 92C of the Act and Rule 10B of
the Rules. Where the profit margins of a comparable exhibit
significant fluctuations, such comparable may not provide a
reliable basis for determining a fair ALP.
27.4 Though the Revenue has questioned the correctness of
the exclusion of the said comparables, it has neither pointed
out any violation of the provisions of the Act or the Rules nor
pleaded or demonstrated that the findings recorded by the
Tribunal suffer from perversity. Unless the findings are shown
to be contrary to the statutory provisions or the Rules, or are
demonstrated to be perverse on the basis of the material
available on record, the conclusions recorded by the Tribunal
remain findings of fact.
27.5 Accordingly, we hold that no substantial question of law
arises for consideration by this Court on this issue.
(8) ITA No.514/2016:
SQL Nos.2 and 3:
28. The Revenue has preferred the present appeal
questioning the exclusion of Accentia Technologies Limited,
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Cosmic Global Limited, Eclerx Services Limited, Tata Elxsi
Limited, and Infosys Technologies Limited from the list of
comparables by the Tribunal.
28.1 While directing the exclusion of Accentia Technologies
Limited, the Tribunal followed its earlier decision in Unisys
India Private Limited, ITA Nos. 67 & 70/Bang/2015,
dated 30.09.2015, and recorded a finding that the company
had undergone extraordinary events during the relevant
previous year on account of amalgamations. The Tribunal noted
that, consequent to the merger and demerger, the financial
statements of the company were revised and restated after six
months from the end of the relevant financial year, thereby
affecting its comparability.
28.2 Similarly, while excluding Cosmic Global Limited, the
Tribunal relied upon its earlier decision in e4e Business
Solutions India Private Limited vs. DCIT, IT (TP) A Nos.
1777 & 1845/Bang/2013, dated 10.11.2015 and held that
the company derived substantial revenue from translation
services and outsourced a significant portion of its translation
work. Having regard to the nature of its activities, the Tribunal
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concluded that the company was functionally dissimilar and,
therefore, not comparable.
28.3 Insofar as Eclerx Services Limited is concerned, the
Tribunal again followed its earlier decision in e4e Business
Solutions India Private Limited (supra) and held that the
company was functionally different, being engaged in providing
high-end knowledge process outsourcing services involving
specialised domain knowledge and automation expertise.
28.4 While directing the exclusion of Tata Elxsi Limited, the
Tribunal, upon examining its annual report, recorded a finding
that the company was engaged in diversified activities,
including embedded systems, product design, industrial design
services, engineering services, visual computing laboratories,
and system integration and support services. Under these
broad segments, the company was found to be carrying on
multiple diversified product design, engineering design, and
visual computing activities. On that basis, the Tribunal
concluded that the company was functionally dissimilar to the
assessee and, therefore, not comparable.
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28.5 Similarly, while excluding Infosys Technologies Limited,
the Tribunal recorded that the company is a market leader
possessing significant brand value, substantial research and
development activities, and valuable intangible assets. Placing
reliance upon the judgment of the High Court of Delhi in the
case of Commissioner of Income-tax vs. Agnity India
Technologies (P.) Ltd., [2013] 219 Taxman 26 (Delhi),
the Tribunal held that Infosys Technologies Limited could not
be regarded as a suitable comparable.
28.6 We find that the findings recorded by the Tribunal are in
conformity with the provisions of Section 92C of the Act and
Rule 10B of the Rules. The Revenue has neither pleaded nor
demonstrated that the said findings suffer from perversity. In
the absence of any demonstrated perversity, the findings
recorded by the Tribunal remain findings of fact and do not give
rise to any substantial question of law.
28.7 Accordingly, we hold that no substantial questions of law
arises for consideration by this Court on this issue.
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SQL No.4:
28.8 We have held that Working Capital Adjustment is one of
the comparability adjustments intended to eliminate the
material effects of differences impacting the profit margin and
to make reasonably accurate adjustments, as contemplated
under Rule 10B(3) of the Rules.
28.9 In the light of the aforesaid findings, we are of the view
that no substantial question of law arises for further
consideration on this issue.
28.10 Substantial Question of Law No. 1 does not arise for
consideration in view of the order of remand passed by the
Hon'ble Supreme Court.
(9) ITA No.884/2017:
29. The Revenue has raised a substantial question of law
regarding the exclusion of certain comparables based on the
earlier decisions of the Tribunal. The Tribunal directed the
exclusion of six comparables on the ground of high turnover.
The Tribunal has consistently adopted a turnover benchmark of
Rs.200 crores, which we have held to be justified. The turnover
of the comparable companies is 23 times that of the tested
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party. On that ground, the Tribunal was justified in directing
their exclusion. In the absence of any violation of the provisions
of the Act or the Rules, the same cannot be held to be
impermissible. Further, the Revenue has neither pleaded nor
demonstrated perversity in the findings of the Tribunal. In the
absence of any demonstrated perversity, the findings of the
Tribunal remain findings of fact, giving rise to no substantial
question of law.
29.1 Accordingly, we hold that no substantial question of law
arises for consideration by this Court.
(10) ITA Crob.No.1/2018 in ITA No.884/2017:
30. The assessee has preferred the cross-objection
questioning the exclusion of certain comparables by the
Tribunal.
30.1 The Co-ordinate Bench of this Court, in the case of Smt.
Jyothi Kumari v. Assistant Commissioner of Income-tax
(Inv.) Circle–2, [2012] 20 taxmann.com 236 (Kar.), has
held that a cross-objection is not maintainable in an appeal
under Section 260A of the Act. In view of the above judgment,
the cross-objection is hereby dismissed.
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(11) ITA No.10/2011:
SQL No.20.6:
31. We have held that, by virtue of sub-section (2A) of
Section 92C, inserted by the Finance Act, 2012 with
retrospective effect from 01.04.2002, the proviso to Section
92C, as it existed prior to its amendment by the Finance (No.
2) Act, 2009, is inapplicable. We have further held that the
2012 amendment operates retrospectively from Assessment
Year 2002-03. For the reasons assigned by us while answering
Substantial Question of Law No. 1 in ITA Nos. 23/2011 and
24/2011, we are inclined to answer this question in favour of
the Revenue and against the assessee.
SQL No.20.5:
31.1 The Tribunal excluded M/s. RS Software Private Limited
as a comparable on the ground that it had a negative profit
margin of (-16.33%), and M/s. Hinduja TMT Limited and M/s.
Aftek Infotech Limited on the ground that they had earned
abnormally high profits, thereby impairing the reliability of the
statistical results. The Tribunal recorded a finding that
companies having either abnormal losses or abnormal profits
cannot be regarded as suitable comparables. On the basis of
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the profit margin data available on record, the Tribunal directed
the exclusion of the said comparables.
31.2 While considering the challenge by the Revenue to the
exclusion of comparables on the ground of abnormal profit
margins, which includes one of the comparables involved in the
present case, we have held that companies earning abnormal
profits or incurring abnormal losses cannot be regarded as
reliable comparables for benchmarking or determining the ALP.
The Tribunal has also assigned detailed reasons for such
exclusion, which we find to be in conformity with the provisions
of the Act and the Rules.
31.3 In the absence of any demonstrated violation of the
provisions of the Act or the Rules, or any plea and proof of
perversity, the findings of fact recorded by the Tribunal cannot
be examined as a substantial question of law.
31.4 Accordingly, we hold that no substantial question of law
arises for consideration by this Court.
SQL Nos.20.7 and 20.8:
31.5 The Tribunal directed the exclusion of comparable
companies having a profit margin of less than 6%. The
assessee had entered into a contract with its German
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Associated Enterprise and was operating in a risk-mitigated
environment. The Tribunal further found that the assessee had
agreed to undertake the work on a cost plus 6% basis. Having
regard to the profit level indicator of 6%, the Tribunal directed
the exclusion of comparables having a margin below 6%.
31.6 In the peculiar facts of the present case, where the
contract itself is on a cost plus 6% basis, this Court does not
find any infirmity or error in the approach adopted by the
Tribunal warranting interference. The determination of the ALP
requires comparison with companies that are comparable in
terms of functions performed, assets employed, risks assumed,
and the nature of the contractual arrangement.
31.7 In that view, we hold that the Tribunal has not acted in
violation of any provision of the Act or the Rules. The findings
recorded by the Tribunal are based on the facts of the case and
the settled principles governing transfer pricing. Accordingly, no
substantial question of law arises for consideration by this
Court.
SQL No.20.9:
31.8 This question relates to the acceptance of Satyam
Computers Limited as a comparable, despite the contention
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that its audited financial statements were unreliable on account
of alleged falsification.
31.9 The Tribunal considered ten comparable companies with
profit margins ranging from 6.09% to 40.96%. The profit
margin of Satyam Computers Limited was 30.86%. ADCC
Research and Computing Center Limited had a profit margin of
40.96%, while Xcel Vision Technologies Limited had a profit
margin of 35.88%.
31.10 Though it is contended that the financial statements of
Satyam Computers Limited were unreliable due to falsification,
no prima facie material has been placed on record to establish
such falsification, except a reference to certain proceedings
initiated against its Managing Director. Moreover, Satyam
Computers Limited is only one among the ten comparables
considered by the Tribunal. The assessee has not questioned
the inclusion of comparable companies having profit margins of
40.96% and 35.88%. There are, therefore, other comparable
companies with profit margins close to that of Satyam
Computers Limited.
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31.11 In the above circumstances, this Court finds no reason
to exclude Satyam Computers Limited from the list of
comparables merely on the ground urged by the assessee,
particularly when its profit margin falls within the range of the
other comparables considered by the Tribunal.
31.12 Accordingly, we hold that no substantial question of law
arises for consideration by this Court.
SQL No.20.10:
31.13 This question relates to the treatment of donations as
operating income and the exclusion of income-tax refund from
the operating income for the purpose of computing the net
margin. The present appeal has been remitted for
reconsideration only on issues relating to transfer pricing
adjustments. We do not find it necessary to adjudicate this
question, as it does not fall within the ambit of the directions
issued by the Hon'ble Supreme Court while remanding the
matter for reconsideration by this Court.
32. The appeals stand disposed of in view of the
observations made hereinabove.
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Pending I.As., if any, stand disposed of.
We place on record our appreciation for the able
assistance rendered by Sriyuths Sri Damodar M. Nayak,
Amaregouda Kellur and Sri Harshith A., Research Assistants.
Sd/-
(S.G.PANDIT)
JUDGE
Sd/-
(K. V. ARAVIND)
JUDGE
DDU
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